(Idea) GeoPark
GeoPark Ltd. (GPRK) is a Bermuda-domiciled E&P listed on the New York Stock Exchange. Its headquarters is in Bogota Colombia, and its operations are spread throughout Colombia, Ecuador, and Brazil. Its far-flung operations are shown below.
Source: GPRK March 2024 Investor Presentation.
Despite GPRK diffuse operating footprint, the lion’s share of its operating income is derived from Colombia. This has been the case over its history, as shown below.
The benefits of operating in Colombia are the country’s huge exploration upside and realizing prices tied to the Brent benchmark, which trades at a premium relative to WTI.
But GPRK is also exposed to the risks of operating in Colombia, like Parex Resources (PXT:CA), which we profiled last week and can be found here. GPRK shares have to be considered relative to PXT, as the primary risk for both stems from operating in Colombia.
We aren't experts on Colombia, so we won't attempt to gauge the risks of operating there. Instead, we'll keep our analysis focused on GPRK's economics.
GPRK’s operating netback generated at $87.50 per barrel WTI is on par with that of PXT. Its cash flow breakeven is also similar to PXT, in the mid-$60s per barrel WTI, though GPRK's higher breakeven is primarily due to its lower capex. But GPRK’s higher corporate costs increase its cash flow torque to higher oil prices. Its higher debt load relative to PXT increases its interest expense, while its far-flung operating footprint increases its G&A.
GPRK’s free cash flow gets a boost relative to PXT because its capex program consumes less of its funds from operations than PXT’s.
From an overall financial and operational perspective, PXT is a higher-quality company than GPRK. Its management has increased earnings power and intrinsic value at double the rate of GPRK. Its operating results are more stable and its return on capital is consistently higher. PXT is more conservative, operating with a lower debt balance. It also has a 5 million acre land position that is roughly 25% greater than GPRK's (still massive) 4 million acres.
PXT’s superior investment attributes are reflected in its stock valuation.
We’d note that over time, PXT shares have appreciated more than GPRK, as shown below.
Since 2012, PXT has returned 186% to its shareholders versus GPRK’s disappointing 35%. Add the dividends over this timeframe and PXT’s return increases to 229% versus GPRK’s 53%.
PXT’s multiple of EV to cash flow at $87.50 per barrel WTI is 3.7-times, versus GPRK’s 2.3-times.
Despite PXT’s premium valuation relative to GPRK, both stocks are depressed versus North American E&Ps. The risks to cash flows posed by Colombia’s changing royalty and tax regimes have played a significant role in the performance of both shares, neither of which have recovered to their levels at the beginning of the year, let alone highs achieved in October. Both are down more than 16% from year-ago levels.
By contrast, indices capturing U.S. E&Ps (XOP) and Canadian E&Ps (XEG:CA) have been on a tear. Both are up more than 17% from one year ago. Both are also trading above their October highs.
GPRK’s poor share price performance relative to North American E&Ps and PXT, as well as its lower trading multiple compared to PXT beg the question of whether its shares offer a better risk/return proposition than those of PXT.
Which is a Better Investment, PXT or GPRK?
Since PXT and GPRK share nearly identical macro risks, investors who want to speculate on Colombia’s political outcomes or who believe that the situation in the country will work to the advantage of domestic E&Ps will likely do better in the near term with GPRK. For one, a greater proportion of PXT’s cash flow will be allocated to exploration-related capex and all the risks it entails. Secondly, if domestic royalties or income taxes are increased, which is always a distinct possibility, PXT’s near-term and longer-term production outlooks could be adversely impacted if it is forced to reduce capex. And lastly, PXT’s shares trade at a premium multiple. As such, they likely have further to fall than GPRK amid a selloff.
GPRK will be increasing its share repurchases, a clear positive for its shareholders given how discounted its shares have become. The company recently announced a modified Dutch tender to buy up to $50 million of shares at prices between $9.00 and $10.00 per share. The gross tender amount represents approximately 10% of GPRK’s current market cap. At the beginning of the year, the company had $133 million of cash on hand, more than enough to fund the tender. Its shares’ low trading multiple means that its repurchases get more bang for the buck than the overwhelming majority of E&Ps, assuming its shares are overly discounting Colombia-related risks.
On a longer-term basis, however, more conservative investors who are comfortable with a Colombia E&P investment will probably be better off sticking with PXT. Overall, we expect PXT's management to be a better steward of shareholder capital. Over a period of several years, we expect it to outpace GPRK's management in terms of building reserves and intrinsic value on a per-share basis.
Leverage isn’t particularly high, at around 1-times cash flow. Management targets around 1.5-times and is comfortable with the current debt position. GPRK’s next long-term debt maturity is in 2027.