GeoPark (NYSE: GPRK) is a small-cap oil company with a market capitalization of less than $500 million. The company has been punished significantly by COVID-19. However, as the first true Latin American independent oil company, which we believe to be the next major oil region, the company has significant long-term potential.
GeoPark Track Record
GeoPark has a strong track record of growing and rewarding shareholders, despite the COVID-19 related downturn.
GeoPark has grown production at 21% annualized and reserves at 17% annualized. Maintaining that strong growth in reserves on the basis of continued production is impressive. As a result, the company has managed to grow NPV at an astounding 25% annualized. That means 6x the company’s current market capitalization.
The company’s NAV/share is $43/share versus just over $8/share in current share price. The company has significant long-term potential. The company continues to have a strong success rate with its drilling with low costs across the board. The company’s finding and development costs combined with operating expenses come out to roughly $9/barrel.
GeoPark 2020 Outlook
GeoPark’s 2020 outlook includes being able to comfortably handle the downturn and generate long-term shareholder rewards.
GeoPark 2020 Outlook – GeoPark Investor Presentation
GeoPark has $157.5 million in cash along with a $75 million oil prepayment facility, should it need it. The company had 27.5 thousand barrels/day in hedged 3Q 2020 production. The company has no long-term debt principal payments until 2024 and $140.3 million in uncommitted credit lines. That leaves the company well-positioned for the downturn.
The company has 90% of its production cash flow positive at $20-30/barrel, exciting for current prices which are still well above that despite recent difficulties. The company has cut its capital program from $190 million at Brent $60-65 to $70 million at current Brent prices. The company’s reaction was so well anticipated it actually expanded it during COVID-19.
The company continues to have 75-80% of its production hedged for the rest of year, which will maintain cash flow as volatility continues.
GeoPark Growth Strength
GeoPark’s efficient growth in cash generation is incredibly strong and worth paying close attention to.
GeoPark Growth Strength – GeoPark Investor Presentation
GeoPark expects to be FCF positive at 2020 as a result of its changes. The company’s operating netback with new capital spending will still result in roughly $90 million in FCF at the midpoint. Versus a market capitalization of less than $500 million that’s a near 20% FCF yield. That assumes $35-40/barrel average oil prices, which could expand significantly.
However, in a normal year, with the company’s original $190 million capital program, the potential is much higher. In a normal year, the company could have still had $200 million in FCF positivity despite a large capital program. That would be a clear indication of how much potential the company has for shareholder rewards.
GeoPark Balance Sheet
GeoPark at the same time has a balance sheet that’s more than capable of handling the downturn.
GeoPark Balance Sheet – GeoPark Investor Presentation
GeoPark has a $232.5 million asset position not counting $140.3 million in uncommitted credit lines. In contrast, the company has $425 million in 6.5% senior notes due in 2024 and $350 million in 5.5% notes due in 2027. These were the lowest priced notes achieved by a single B company with $2.2 billion oversubscribed notes.
That means there’s significant appetite for the company’s debt. The company’s net leverage ratio to EBITDA has gone to 2.3x versus 3.25x incurrence covenant (covenant based on certain actions). The company’s debt is backed up by a 1P reserve life of 7.5 years and a 2P of 11.4 years. The company needs $100 million in annual FCF to pay down its debt to 0.
At the same time, given the company’s EV, if oil prices remain at $40, the company’s share price can more than double in the next 7 years. That represents double-digit annualized returns.
GeoPark has significant potential throughout its asset base to generate long-term shareholder rewards.
GeoPark Pacific Assets – GeoPark Investor Presentation
GeoPark’s Pacific assets center around Colombia and Ecuador. In Colombia, the company has turned the assets into a $2 billion NPV from a $30 million acquisition price. The company has 3.8 million acres and a 14.3 year 3P reserve life. The company has room to continue expanding significantly and developing partnerships.
In Ecuador, the company has respectable assets that it’s identified, although it hasn’t started drilling yet. With synergies with the company’s Colombian assets and the potential for upcoming bid rounds, it could expand here significantly.
GeoPark Atlantic – GeoPark Investor Presentation
On the Atlantic side, the company’s business operations are in Chile, Argentina, and Brazil. The company has 3.5 million acres with only 7,742 barrels/day in production. The company has substantial assets across these locations and all of its production is incredibly low cost production. As a result, the company has significant room to grow and continue to invest.
Across these locations, the company has the potential to generate substantial shareholder rewards and growth going forward. That will combine with the company’s main assets in Colombia and its potential expansion into assets in Ecuador.
GeoPark’s risk is the chance of a significant decline in crude oil prices. The company is still anticipating roughly $90 million in FCF for the year; however, if prices dropped down towards $30/barrel, that would make the company have FCF near $0. That would be a significant decline when the company has debt due in the coming years.
So far, that hasn’t been an issue. However, it could potentially be an issue going forward. The impact of oil prices on the company is the company’s largest risk over the coming years
GeoPark has an impressive portfolio of assets that’s worth paying attention to. The company is the first true Latin American oil producer, which we believe will be the next major global oil producing region, and with countries like Colombia becoming more stable, the company has the potential to take advantage of the situation.
GeoPark, however, is a cash flow machine. The company anticipates $90 million in 2020 cash flow, even increasing its capital spending to take advantage of the situation. The company can generate another $120 million in FCF at 2019 prices, even with its old capital spending, and its market capitalization to FCF ratio of just over 2.
Putting this together, GeoPark is a quality long-term investment opportunity.
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Disclosure: I am/we are long GPRK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.