Stock of the Week
Stock Symbol: GPRK
Price as of 6/3: $16.08
After a good start to the year, Sell in May and go away is certainly working. The S&P 500 lost over 6% in the month of May while the Dow dropped 3% the last week of May and notched its sixth straight weekly loss. It's the Dow's longest weekly losing streak since 2011. Most of the blame for the selloff in May was due to no trade deal with China. In fact, the trade tensions are getting worse and now President Trump has added Mexico to the tariff list. It's certainly been difficult to pick stocks in the Trump administration, but with the recent market sell off, the valuations are getting better and it's getting easier to pick stocks.
The energy sector year after year remains one of the worst performing sectors. Thanks to fracking and new technology, the US and other countries are finding more and more oil and natural gas around the world. The good news is, many countries in the Middle East and Russia rely on their oil as their largest source of income for government spending, so they need the price of oil to remain high. Environmentalists, however, want oil companies to cut production to reduce global warming, but as long as people want to drive, fly and transport all their goods, oil will remain in high demand.
Many mature oil companies have limited expansion and growth plans, but this week we'll highlight a fast-growing oil company in South America. The featured stock of the week is Geopark.
Geopark is based in Chile and operates in five countries, but generates a majority of their oil and profits in Columbia. Thanks to Columbia, Geopark was able to double sales in 2018, from $300 million to $600 million and generate $100 of millions in cash flow. Geopark will continue to expand operations in Colombia, but their next growth phase will in Peru late 2019 and 2020 and recently acquired lands in Ecuador.
A little more than a year ago, Geopark made a presentation at an oil & gas investment conference in Dallas Texas when their stock was $10 a share. In their presentation they said based on their proven undeveloped reserves minus their debt the stock could be worth $18 a share. Add in their probable oil reserves and possible oil reserves, Geopark management said the stock could be worth between $29 to $44 a share. This year, Geopark did a similar presentation, but now based on their proven undeveloped reserves minus their debt the stock could be worth $25 a share. Add in their probable oil reserves and possible oil reserves, Geopark management said the stock would be worth between $40 to $79 a share.
2019 will be a transition year for Geopark. Sales are only expected to grow only 14% as they wait for regulatory approval to start production in Peru. Geopark isn't without its risks, being based in South America in countries known for their coffee beans, drug cartels and ever-changing governments, but Geopark has shown good disciple to not expand beyond cash flow keeping their debt level stable. Currently free cash flow is over a $100 million a year which means they could buy back all their stock in nine years. Back in December when the stock dropped to $12 a share, Geopark initiated a share buyback plan of up to 10% of their outstanding shares.
If Geopark continues to execute as they have the last several years, shareholders could be richly rewarded.
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