Reliance On High Domestic Gas Prices Will Likely Pressure Long Term Earnings

Catalysts

About Amplitude Energy

Amplitude Energy is an Australian gas producer focused on supplying domestic markets through existing processing plants and near-field tieback developments.

What are the underlying business or industry changes driving this perspective?

• Reliance on sustained high domestic gas prices, including premiums in volatile spot and power-linked markets, exposes revenue to downside if policy, new supply or demand destruction temper price spikes. This would pressure top line growth and compress EBITDAX margins.
• Execution and timing risk in the East Coast Supply Project, from drilling outcomes to long-lead subsea infrastructure and regulatory approvals, could delay or reduce the anticipated uplift in production toward 100 terajoules per day. This may limit revenue and free cash flow expansion versus expectations.
• Increasing dependence on gas-fired generation to firm a more intermittent grid may face accelerated competition from storage and grid-scale batteries. This could cap long-run load factors and spot price volatility and thereby constrain future realized pricing and earnings growth.
• Concentration of growth in a single basin and plant backfill strategy elevates operational and reservoir performance risk. Underperformance at Orbost or Athena, or weaker than expected reserves recovery, would erode operating leverage, raise per unit costs and weaken net margins.
• Large forward capital commitments for ECSP and associated infrastructure are undertaken with the assumption of multi-year tightness in East Coast gas supply. These could result in subpar returns and slower deleveraging if demand growth underwhelms or competing projects add lower cost volumes, limiting future earnings and free cash flow accretion.

Assumptions

This narrative explores a more pessimistic perspective on Amplitude Energy compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Amplitude Energy's revenue will grow by 8.8% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -15.4% today to 19.6% in 3 years time.
• The bearish analysts expect earnings to reach A$67.6 million (and earnings per share of A$0.23) by about December 2028, up from A$-41.3 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as A$118.2 million.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 10.4x on those 2028 earnings, up from -20.0x today. This future PE is lower than the current PE for the AU Oil and Gas industry at 13.1x.
• The bearish analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.67%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• A five year track record of uninterrupted production growth, record FY 2025 output and clear line of sight to further Orbost debottlenecking and Athena backfill through the East Coast Supply Project could support structurally higher volumes for longer than expected, lifting revenue and sustaining earnings growth.
• Structural tightness in East Coast domestic gas supply and the increasing role of gas fired generation in firming a more electrified grid may underpin sustained high and volatile spot prices, supporting realized pricing, expanding net margins and improving long term earnings resilience.
• Continuous improvement initiatives, including operational gains at Orbost, commercialization of sulfur byproduct and further cost out in FY 2026, could structurally lower unit operating costs, enhancing operating leverage and driving higher EBITDAX margins and free cash flow than assumed.
• Successful execution of the East Coast Supply Project as a brownfield tieback into existing infrastructure, combined with high prospectivity and relatively low risk Otway Basin exploration, may unlock multi year production growth and portfolio scale, more than offsetting natural field decline and driving higher long run revenue and earnings.
• Ongoing reserve upgrades from improved Sole performance, potential new discoveries in the Otway Basin and opportunities to sweat existing plants through third party tolling or additional tie ins could extend asset lives and plateau production, supporting sustained cash generation, faster deleveraging and higher equity valuations.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Amplitude Energy is A$2.39, which represents up to two standard deviations below the consensus price target of A$3.23. This valuation is based on what can be assumed as the expectations of Amplitude Energy's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$4.0, and the most bearish reporting a price target of just A$2.39.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be A$345.1 million, earnings will come to A$67.6 million, and it would be trading on a PE ratio of 10.4x, assuming you use a discount rate of 6.7%.
  
• Given the current share price of A$2.78, the analyst price target of A$2.39 is 16.3% lower. Despite analysts expecting the underlying business to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.