GeoPark: Best Performing NYSE Oil Company

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About: GeoPark Limited (GPRK)
by: The Value Portfolio
Summary

GeoPark is the single best performing exploration and production company in the NYSE over the past 2 years.

The company has an incredibly impressive asset portfolio that it has executed well on.

I expect that the company's financial and asset base will continue to grow going forward, driving additional value for shareholders.

This is a small-cap name which I recommend holding for the long run.

GeoPark (NYSE: GPRK) is a more than $1 billion (by market cap) oil exploration and production company focused on Latin America. The company is the only pure Latin America oil company and has a significant portfolio of assets. As we will see throughout this article, the company’s impressive portfolio of assets and its execution should result in strong growth. This should allow the company to continue its previous returns to shareholders - the company has been the best performing E&P stock in the NYSE over the 2017-2018 time period. Over this time period, the company has returned more than 250%, beating giants such as Exxon Mobil (NYSE:XOM), Chevron (NYSE:CVX), ConocoPhillips (NYSE:COP), Royal Dutch Shell (NYSE:RDS.A) (NYSE:RDS.B), and so on.

GeoPark - Silver Kris

GeoPark Portfolio Overview

GeoPark has an impressive portfolio with a significant value. The company has been focused on executing with its portfolio.

GeoPark Overview - GeoPark Investor Presentation

The company has a well distributed portfolio of assets, with land spread across Brazil, Argentina, Chile, Peru, Ecuador, and Colombia. The company has hundreds of thousands of acres in each of these locations; however, its largest land holdings are in Argentina and Peru. The company’s 2P reserves are 184 million barrels, which results in a NPV of $2.7 billion, more than double the company’s market cap.

The company’s well spread out portfolio across a number of companies helps the company to keep its risks low. The company’s incredibly strong portfolio here means even if there are execution risks in a single country, the company should be able to execute on the remainder of its portfolio. That will help to keep risks low for shareholders.

GeoPark Capital Investment

To utilize this significant portfolio, GeoPark is investing significantly.

GeoPark Detailed Portfolio and Capital Spending - GeoPark Investor Presentation

The company’s 2018 capital spending was roughly $125 million, meaning the company was investing more than 10% of its market cap in its portfolio. From this, the company anticipates 2019 production of 41 thousand barrels per day, which is a 15% increase over the past year. The company plans to drill 30-36 gross wells from this budget, of which approximately 9 are exploration.

At the same time, at Brent crude oil prices of $65-75 per barrel (the mid-range being 10% above current oil prices), the company would have an incredibly exciting operating netback of $30-35/barrel. This gives the company a significant amount of room to maneuver. Only in early 2016 did oil prices reach below the company’s breakeven price, meaning it can consistently earn.

At the same time, the company’s flexible work program means that it can invest more than $120 million annually in its business. The company should see 15-20% increase in production from this investment going forward. This shows the strength of the company’s capital program.

GeoPark Impressive Colombia Assets - GeoPark Investor Presentation

One of the company’s most significant assets is its Llanos Basin land holdings in Colombia. Another company I wrote about recently, Gran Tierra Energy (NYSEMKT:GTE), which I also believe is a good investment, is a major investor in the country. This is because after decades of instability, Colombia as a country is finally open for business. There are significant opportunities here.

The company has had incredible amounts of success here, having grown 2P reserves and production by close to 50% annually. The company has a significant track record here, and has identified numerous drilling locations that it can use to explore and expand (the number of locations = 3x the company’s entire spread out drilling plan). This shows the long-term potential the company has here.

The Llanos Basin here is an incredibly strong asset. The company managed to grow the value of its assets here by 4,500% in 6 years, which is impressive to see. I expect the company will continue to grow going forward, significantly increasing the value of the company’s Colombia portfolio.

GeoPark Peru Assets - GeoPark Investor Presentation

Another area of growth for the company is Peru. The company is still expanding and exploring here; however, 2 test wells have a combined production rate of 7,500 bpd and the company has a world class asset portfolio. The company has been exploring this asset rapidly, and expects to continue, with first oil expected by year-end 2020. Given the several hundred million barrels here, that is some impressive results.

Moving on to smaller assets, the company has some assets in other countries that simply generate steady, respectable, cash flow. In Argentina, the company has 2.2 million acres, with 2P reserves of 14.2 million barrels. The company has roughly 2,400-2,500 bpd of production here, which provides some steady cash flow. I would like to see the company utilize its land here more. 2.2 million acres is a lot relative to the company’s production.

Another final area of cash flow for the company is its Brazil assets. Here the company also produces 2,000-2,500 bpd, from 300 thousand acres. These assets are under a deal to companies in Brazil to sell the gas back to Petrobras (NYSE:PBR) at a solid rate. At the same time, the company is participating in Petrobras' divestitures, which could increase the asset base.

Overall, the company expects $15-20 million per year in steady cash flow from Brazil. That will help support the company’s future capital expenditures.

GeoPark Chile Asset Portfolio - GeoPark Investor Presentation

The last major asset we’ll discuss for the company is its assets in Chile, where the company has 800 thousand acres across 5 operated blocks and 24.7 million barrels. Here prices are attractive, and the company entered the country as the first E&P operator. The company has net exploration resources of more than 100 million barrels per day and expects that to increase going forward.

GeoPark Financials

Now that we have an overview of the company along with an understanding of its incredibly impressive asset portfolio, let’s discuss the most important aspect, its financials.

GeoPark Share Price Performance - GeoPark Investor Presentation

GeoPark has been the best performing E&P stock from 2017-2018 in the NYSE (source), as a result of the company’s execution on its asset portfolio. The company trades significantly below its 1P NAV and even further below its 2P NAV. More so, the company has continued to aggressively work on its strategy, which will result in the values of these assets going up in the future. That should continue to support the company’s share price.

Oil development in South America and Latin America lags behind much of the rest of the world, while the area is rapidly industrializing. The company sees an astounding $4 billion+ worth of new project inventory. Latin America is believed to have the largest amount of energy potential behind the Middle East (slide 18 of the company's corporate presentation), and production along with demand are expected to grow going forward.

GeoPark Cash Generation Ability - GeoPark Investor Presentation

GeoPark has an incredibly strong balance sheet with a low 0.8x net debt/EBITDA ratio. The company has $147 million of net cash and $425 million in liabilities. The company’s oil portfolio has a low breakeven rate, which should result in continued strong cash flow in the coming years. The company’s cash flow generation tripled from 2015 to 2018.

As a result of the company’s strong financial position, I recommend investing in it going forward.

Risks

As with any other investment, GeoPark still faces a number of risks that investors should take into account.

The company's primary 3 risks are oil prices, lack of exploration success, and regional instability.

Oil prices, like every other risk, are the primary risk that the company faces. The company's breakeven price is roughly $30-40 per barrel, which is well below current Brent prices. However, prices have gone below this level before, especially in early 2016 when oil prices first crashed. As a result, should prices crash down again and stay there, that'll significantly hurt the company's financials and therefore its ability to invest in growth.

Lack of exploration success is a another significant expenditure for the company. The company has been investing more than $100 million per year in capital spending. That is a significant amount of spending in relation to the company's size and its cash flow generation abilities. If the company's exploration doesn't pan out, it'll be in a tough position. However, the company spreading its spending across numerous assets should help its position and minimize the risk here.

The last potential issue for the company is regional instability. One of the reasons that Colombia has seen limited capital spending is because of the potential for instability. The country recently signed a deal with the Farc rebels, that significantly helped the company's stability to improve. Now the region represents an area of enormous opportunity. However, if instability comes again, that'll negatively impact the company's income.

Conclusion

GeoPark has managed to outperform every other E&P company in the NYSE in the 2017-2018 time period. This is a trading group that includes every other major oil company and shows the strength of the company’s asset portfolio. The company has assets spread across Latin and Central America, and these assets will continue to grow going forward.

The company’s asset portfolio is incredibly impressive and the company has identified billions in new opportunities. Some of the company’s impressive opportunities, especially those in Colombia and Chile, have enormous long-term growth potential. However, some of the company’s other impressive assets generate strong and reliable cash flow. Together, the company’s assets generate strong long-term cash flow.

GeoPark has a significant amount of potential going forward and I recommend investing.

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.