On November 4, 2020, GeoPark Limited (GPRK) reported the financial results for the 3Q2020 ended September 30, 2020. The company also revealed its 2021 capital plan and work program. It is time to review the investment thesis of this company based on the newly-available information.
Production and revenue
In the 3Q2020, production averaged at 38,845 boe/d, including 32,875 boe/d and 35,814 Mcf/d (Fig. 1).
Fig. 1. The production profile of GeoPark. Source: Laurentian Research, based on GeoPark released information.
The 3Q production is still 15.1% below the previous high of 45,731 boe/d reached in the 1Q2020 following the completion of the acquisition of Amerisur; nonetheless, it was up 5.2% over 2Q2020, thanks to the reopening of wells that was shut-in in the 2Q and to three wells put on production in the Llanos 34 block, Colombia (Table 1). Production recovered to 40,000 boe/d by the end of 3Q2020.
Table 1. A summary of the operating and financial results of GeoPark. Source: Laurentian Research, based on GeoPark released information.
From 2Q to 3Q2020, although the Brent benchmark rose by 30.8%, the realized price increased by 65.8%, mainly due to the net effect of (1) commodity risk management contracts (US$2.7 million gain in 3Q vs. US$9.1 million loss in 2Q), (2) local marker differential to Brent (US$3.0/bo in 3Q compared to US$6.5/bo in 2Q), and (3) commercial and transportation discounts (US$2.1/bo and US$9.0/bo in 3Q vs. US$2.4/bo and US$8.6/bo in 2Q).
Between a 5.2% production increase and a 65.8% improvement in realized price, GeoPark achieved a sequential revenue increase of 76.4% (Table 1).
Since 1Q2020, GeoPark has cut costs substantially; service contracts were renegotiated, salary and bonus were voluntarily reduced, and new operational efficiencies were gained. The 3Q2020 costs (including production & operation costs, geological and geophysical expenses (G&G), general and administration (G&A), and selling expenses) are 18.0% lower than those in the pre-crash 1Q2020.
From 2Q to 3Q2020, the increase in production & operation costs, offset by a decrease in geological and geophysical expenses (G&G), general and administration (G&A), and selling expenses, led to a moderate 10.0% cost appreciation. Due to the sequential cost appreciation, the 76.4% revenue growth was converted to a 66.5% operating netback increase (Table 1; Fig. 2). The expansion of margin in combination with curtailed capital expenditures led to much improved FCF, which rose from US$2.1 million to US$35.9 million in the quarter. The business has clearly turned around.
Fig. 2. The operating netback, adjusted EBITDA, and FCF. Source: Laurentian Research, based on GeoPark released information.
Outlook of 2021
GeoPark has approved a self-funded 2021 work program of US$100-120 million. The 2021 work program includes drilling of 31-34 gross wells, with 65% to be allocated to development activities and 35% to exploration activities.
The US$100-120 million of CapEx, fully funded by cash flow, will be mostly (US$95-115 million) spent in Colombia (Table 2):
- 23-25 development and appraisal wells plus facilities in the Llanos 34 block
- 2 development and appraisal and 3-4 exploration wells plus 3D seismic in the CPO-5 block
- one exploration well in the Llanos 94 block
- one appraisal and one exploration well in the Llanos 32 block
- seismic acquisition, reprocessing, and other preliminary and preoperational activities in exploration blocks in the Llanos and Putumayo basins
Table 2. Highlights of the 2021 work program. Source.
Along with the recovering oil price, GeoPark has clearly turned around in operations. The company has demonstrated remarkable resilience during the 2Q2020, one of the worst oil crashes of all time, thanks to its low-cost assets and flexible management.
For a free cash flowing producer potent in production growth (contingent upon a bull market), GeoPark is deeply undervalued. It currently trades at 4.50X of EBITDA or 16% of the NAV. For 2020, a year of a severe industry downturn, its FCF yield is projected to be 22.4%.
The greatest risks continue to be the volatility of the oil price and whether the exploration program will result in discoveries. However, if an investor would like exposure to a cash flow cow with an option on the oil price, the investor can hardly find any better investment target than GeoPark.
Adding to the attractive risk-reward profile is the newly-announced share buy-back program and dividends (see here). The company plans to repurchase 10% of the outstanding shares in the next 12 months. It also declared quarterly dividends of US$0.0206 per share (yielding 1.24%) and special dividends of US$0.0206 per share, both payable on December 9, 2020, to the shareholders of record at the close of business on November 20, 2020. These shareholder-friendly moves should help cushion the downside going forward.
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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.