Geopark Vaca Muerta acquisition analysis

[Petroleum economist]

Geopark announced today the $ 190 M acquisition of a 45-50% working interest in four Blocks in the Vaca Muerta (Argentina) with production of 5.5-6.5 K BoE/d

Acquisition details
• The acquisition is assumed to close late Q3. The acquisition contains proven reserves of 25.0 M BoE plus an additional 24.5 M BoE probable reserves. The acquisition will increase current Geopark production of 35-37 K BoE/d to 40-43 K BoE/d
• As part of the deal GeoPark will fund (1) 100% of an exploration effort up to $113 M spread out over two years and (2) the acquisition of midstream capacity for $11 M. Geopark will receive a $ 10 M bonus contingent on successful exploration.
• Early funding will come from a mix of available cash and a draw of an existing oil prepayment facility. Longer term commitments will be funded with a combination of cash generated by the assets and financing.

Impact on reserves and production
• Geopark in the last four years has been unsuccessful in adding reserves. RRR’s varied from -0.11 to 0.62. In total only 9.3 M BoE were added in the four-year period versus a production of 50.8 M BoE.
• Late 2023 Geopark had proven reserves of 68.8 M BoE, equivalent to a very low 5.5 years of 2024 production.
• Due to the lack of reserves, production should decline over the next 5-10 years with 8-10%/year.
• The 2024 acquisition will increase existing proven reserves with 25 M BoE (=36%) and production with 6 K BoE/d (=16%).
• The reserves picture improves a bit. The decline will start a year later but overall will not stop the decline of production from 2026 onwards with 7-9% per year.

Balance sheet
• Before the acquisition GeoPark had a low solvency (17.3%).
• The acquisition will lower the solvency to an extremely low 14.6%.
• The debt/EBITDA ratio at 1.3-1.4 on face value looks reasonable but its meaning is dubious due the high income tax rate (50% in 2023).
• Geoparks balance sheet is weak. Shareholder returns should be limited.

Profitability
• Geopark is profitable.
• Unit costs (inclusive depreciation, interest and overheads) are a medium high $ 39.50/BoE.
• The acquisition adds about $ 0.20-0.30 to the eps.
• With WTI= $ 80/bbl, Geopark in 2024 can earn in $ 179 M (eps = $ 3.20, PE = 3.0), increasing to $ 187 M (eps = $ 3.35) in 2025.
• Geopark is sensitive to oil prices. At WTI=$ 70/bbl, 2024 net profit will reduce to $ 129 M (eps = $ 2.31, PE 4.2).
• With lower production after 2025, net profits will reduce.

Shareholder returns
• Despite the weak balance sheet, Geopark paid in 2023 an annual dividend of $ 0.53 and bought back 3.08 M shares for $ 31.2 M.
• Shareholder returns were equivalent to a total yield > 10%.
• In 2024 I can see the dividend being maintained but the share buyback will sharply reduce.
• Yield in 2024 could reduce to 2.6% (=dividends only) to 7% (dividends plus some share buybacks).

Conclusions
Geopark has attractive net profits and is a stock with a low PE. It had attractive shareholder returns but these will reduce. The balance sheet is very weak and needs reinforcement. The wisdom of the shareholder returns can be queried.

Geopark is sensitive to low oil prices and will see a falling production after 2025.

Geopark ranks 9th in my oil and gas company ranking, although I feel this is not completely representative. Balance sheet weakness and political risks should carefully be considered before investment.