Chile is one of the most stable and business-friendly countries in Latin America, but it has to import substantial amounts of energy. Since neighbouring Argentina was forced to cut its gas exports in 2004, the Chilean government has been seeking to maximise domestic hydrocarbon production. This ensures a supportive environment for GeoPark, whose core business is producing gas from the Fell field in southern Chile.
While small, GeoPark has already made an impact - it was the first private-sector company to extract hydrocarbons in Chile when it began production in mid-2006, and it remains the only private player in the sector. Its status is also boosted by the endorsement of the World Bank's private sector funding arm, the International Finance Corporation, which invested $10m (£4.96m) to buy 8 per cent of GeoPark's equity, and has lent the company $20m. GeoPark therefore benefits from the World Bank's ‘umbrella’, the idea that governments are not keen to mess with enterprises that it funds.
Current production from GeoPark’s clutch of Fell wells is relatively low - just 1,216 barrels of oil-equivalent per day (boepd) in the first half of 2007. Even so, the company has teamed up with a major, and politically punchy, customer, Methanex, which is the world’s largest producer of methanol, supplying 10 per cent of global requirements, and a major contributor to Chile's export earnings.
Methanex has undertaken to buy all gas produced by GeoPark for 10 years from this year, and has signed a co-operation agreement that assumes the two companies will jointly explore and develop new Chilean gas reserves. Not just this, but last month Methanex effectively lent GeoPark $40m against future gas sales to help develop the Fell field. This prompted GeoPark's shares to jump because, until then, City analysts were not sure where funding was coming from.
So, with funding now in place, GeoPark looks set to realise the planned rapid increase in output from Fell. Management hopes that by the end of the year production will be running around 4,000boepd and this should increase to an average of 7,000boepd in 2008 and to 14,000boepd in 2009 - hence the rapid growth in profits shown in our table. Those profits should be high quality, too, with most of them coming through as cash. Despite that, GeoPark's shares look incredibly cheap. It's not just that the PE ratio is so low (see table), but the shares trade well below estimates of net asset value. For example, stockbroker Oriel believes that GeoPark's proven and probable reserves - those more likely than not to be brought into production - are worth 603p per share.
But the market has some reasons for its lack of enthusiasm. GeoPark’s approach to the Fell field involves rehabilitating existing wells previously drilled by Chilean national oil company ENAP alongside targeting new reserves. As such, it is seen as an ‘asset scavenger’. Such companies often have a robust business model in the here and now, picking up oil and gasfields too small for larger companies to exploit profitably. The trouble is, however, investors often don't see it that way. With relatively short production lives foreseen for their assets, investors inevitably wonder how long such companies will remain in business. In GeoPark’s case, roughly 29m barrels of oil-equivalent proven and probable reserves can sustain production at planned rates for around six years. Besides, with the Methanex tie-up and the World Bank's support, if any independent oil and gas company is going to find new reserves in Chile, it should be GeoPark. More prosaically, it is difficult to buy GeoPark shares in any size. But that's not such a drawback for those who get in there quickly. Buy.
BULL POINTS
Only independent gas producer in Chile
World Bank umbrella
Key development financing secured
Shares trade well below likely asset value
BEAR POINTS
Lacking long-term assets
Shares difficult to trade
GEOPARK (GPK) | ||||
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ORD PRICE: | 455p | MARKET VALUE: | £140m | |
TOUCH: | 452-458p | 12-MONTH HIGH: | 485p | LOW: 286p |
DIVIDEND YIELD: | nil | PE RATIO: | 3 | |
NET ASSET VALUE: | 126¢ | NET DEBT: | Nil |
Year to 31 Dec | Turnover ($m) | Pre-tax profit ($m) | Earnings per share (¢) | Dividend per share (¢) |
---|---|---|---|---|
2005 | 3 | -3 | -16 | Nil |
2006 | 6 | -11 | -44 | Nil |
2007 * | 15 | -8 | -25 | Nil |
2008 * | 75 | 35 | 104 | Nil |
2009 * | 150 | 93 | 275 | Nil |
% change | +100 | +166 | +166 | - |
Normal market size: 1,000 Market makers: 3 Beta: 0.06 £1 = $2.02 *Oriel Securities estimates |