2023-04-14 08:06:09 ET
Summary
- GeoPark has seen its share price drop substantially, trading at an incredibly low valuation, partially offset by its debt.
- The company needs to deliver with its 2023 capital program, not just maintaining production, but setting itself up for production and reserve growth.
- The company has the ability to drive strong shareholder returns, but 2023 is really a transition year to justify a long-term investment.
GeoPark ( GPRK ) is a South-American small cap oil producer that has been punished as oil prices have dropped. Unfortunately, for small-cap oil producers, it's tough to get a true valuation figure as their "ambitions" can outgrow their "assets". However, as we'll see throughout this article, GeoPark is undervalued at this time with a unique asset portfolio it can use to drive long-term value.
GeoPark Long-Term Value
GeoPark is focused on building long-term value from its assets, as it remains concentrated to operating in South America.
The company is a low-cost operator, one of its strongest assets in a world of volatile oil prices, with 90% of its production cash flow positive at $25 Brent. The company is supported by low lifting costs and can quickly ratchet down capital expenditures in a downturn, although it is affected in the long-term. The company has managed to substantially grow in the last decade.
GeoPark Portfolio Targets
However, the true test of the company, as we'll see after the stagnation discussion in the next section, is whether it can grow.
GeoPark wants to grow production at 10% annualized to at least ~57 thousand barrels/day by 2026. The company expects to spend a substantial $775 million in development & exploration capex on this (more than its market cap) with 190 total wells drilled. The company has 750 million barrels of un-risked exploration resources it wants to quantify.
The core of the company's portfolio is in Colombia, which adds some geopolitical risk. The company is the second largest operator in the country, with 8.9 years (110 million barrels) of 2P reserves. The company's assets total a massive 3.8 million acres in the country, and the company has substantial un-risked assets here.
Outside of Colombia, Ecuador, Chile, and Brazil, all represent areas where the company is looking for future growth. The company's peer is Colombia is Parex Natural Resources, at roughly 3x the size, and we could see substantial synergies from a merger here. The CPO-5 block, run by the national oil company of India, is a potential major source of growth here.
GeoPark's Stagnation
The question for the company will be can it repair the stagnation it's seen since the COVID-19 pandemic.
Despite the company having a strong portfolio of assets, it effectively stagnated starting in 2020, as capital expenditures were cut drastically from the COVID-19 pandemic. Simultaneously the company's cost reduction targets ended, although, to be fair, it has managed to maintain low costs in a tough inflationary environment.
The company has a number of rigs actively working and a substantial exploration budget, so the question remains whether that's enough for the company to turn around.
GeoPark 2023 Targets
2023 represents the company's highest capital spending in almost a decade, as it returns to growth in a tough environment.
We're looking for not just maintained production, but growth, as a result of the company investing a staggering 30% of its market cap into capital expenditures. The company is targeting 40.5 thousand barrels/day of production, which is minor production growth, but hopefully sets up the stage for future success.
The company is spending $100 million out of its $210 million base case capital budget on maintenance development, which means substantial spending on exploration and growth. We'd like to see reserves increase substantially YoY as an indication of success here.
GeoPark Shareholder Returns
At the end of the day, what matters is shareholder returns, and GeoPark, with almost $50/barrel in operating netback, can provide them.
There's a number of things we're looking for to justify this investment through 2023 as a long-term. Fundamentally, it's for the company to prove it can transition out of a low-price mentality and grow, without getting caught up in spending capital without seeing the returns. The company's guidance indicates it'll be able to do that.
It's also worth highlighting here, that the company used 2022's higher prices to aggressively pay down debt, but it's still paying roughly $30 million/year in ~$350 million on debt. No debt is due until 2027, but with the financial environment tough for small-caps, we'd like to see that number continue to shrink for the company.
The company is planning to spend the $200 million of capital we discussed, pay taxes, debt servicing, etc. and be left with roughly $130 million in FCF at $85/barrel Brent, slightly above current prices. At $75/barrel that becomes $95 million and at $95/barrel it becomes $155 million. It shows the company can handle the downside.
The company is aiming for $65 million in dividends and buybacks, which is almost 10% after its recent share price drop. That's an incredibly strong yield given the company is saving half its FCF while investing heavily. With its share price at just under $12/share we'd like to see substantial buybacks here. The company needs to see success from its exploration to justify more investment.
Thesis Risk
The largest risk to our thesis is crude oil prices, especially as GeoPark invests massive amounts of capital to improve its business. We expect that the company, with its low breakeven, will be able to handle the downturn. However, should oil prices drop and remain lower, the company will struggle to maintain its valuation.
Conclusion
GeoPark has an impressive portfolio of assets. South America is often neglected from an oil investment point of view. The company has millions of acres of assets and it's finally investing the hundreds of millions of capital it needs to revitalize its portfolio and focus on growth. Over the last few years, the company's portfolio has stagnated.
The company is planning to have almost 10% shareholder returns after its capital spending and saving 50% of its FCF. It's worth to aggressively pay down its debt and we'd like to see that continue but now is also a great time to repurchase shares. Overall, GeoPark is a valuable investment, but 2023 is a transition year worth paying close attention to.
For further details see:
GeoPark: Strong South American Oil