Blackrod Phase 1 Project Will Drive Future Production Capacity

Key Takeaways

• Significant investment in Blackrod Phase 1 is expected to enhance future revenue through increased production capacity.
  
• Share buybacks and effective cost management may boost profitability and increase earnings per share.
  
• Significant capital expenditures, exposure to volatile oil prices, and foreign exchange losses could impact cash flow, revenue stability, and overall financial flexibility.

Catalysts

Explores for, develops, and produces oil and gas.

• The transformational Blackrod Phase 1 development represents a significant growth project for IPC, with substantial investment leading to expected future increases in production capacity. This will likely enhance future revenue as production ramps up.
  
• Operational excellence and accurate forecasting by the company have maintained production levels within guidance, supporting stable cash flow and positioning the company for potential growth in earnings as operational efficiencies are leveraged.
  
• The company's commitment to share buybacks, evidenced by the renewal of the NCIB program, could create additional value for shareholders and potentially increase earnings per share (EPS) as the number of outstanding shares is reduced.
  
• Effective management of operating costs, which came in below guidance due to weaker commodity-linked input costs, could result in improved net margins, enhancing the company's profitability in future years.
  
• The company's robust liquidity position, with significant cash reserves and access to an undrawn revolving credit facility, provides flexibility to pursue additional value-adding activities that could drive future revenue and earnings growth.

International Petroleum Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming International Petroleum's revenue will grow by 9.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 12.9% today to 16.1% in 3 years time.
• Analysts expect earnings to reach $168.5 million (and earnings per share of $1.53) by about March 2028, up from $102.2 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $226 million in earnings, and the most bearish expecting $105.4 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.5x on those 2028 earnings, down from 16.8x today. This future PE is lower than the current PE for the CA Oil and Gas industry at 12.6x.
• Analysts expect the number of shares outstanding to decline by 6.3% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.31%, as per the Simply Wall St company report.

International Petroleum Future Earnings Per Share Growth

Risks

• Significant capital expenditure on the Blackrod Phase 1 development project has led to negative free cash flow (USD -135 million for 2024), which could constrain liquidity and limit available resources for other investments or unforeseen expenses, affecting the company's financial flexibility and future earnings potential.
  
• The absence of oil benchmark hedges at the start of 2024 and reliance on volatile commodity markets exposes the company to fluctuating oil prices, which could impact revenue stability if oil prices fall below the hedged thresholds of $85 and $80 for Brent and WTI, respectively.
  
• Higher gas prices slightly increased operating expenses to $18 per barrel in the fourth quarter, highlighting potential cost pressures that could erode net margins if energy costs continue to rise.
  
• Weak gas prices in Alberta, despite being twice as much as in the third quarter, remain below CAD 2 per Mcf and could limit revenue from the gas segment, impacting overall revenue and cash flow.
  
• Foreign exchange losses have led to a $10 million hit on financial results due to the weak Canadian dollar, which may create ongoing risks to net earnings if currency fluctuations continue unfavorably against the USD.

Valuation

• The analysts have a consensus price target of CA$21.589 for International Petroleum based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$27.94, and the most bearish reporting a price target of just CA$17.74.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.0 billion, earnings will come to $168.5 million, and it would be trading on a PE ratio of 10.5x, assuming you use a discount rate of 7.3%.
• Given the current share price of CA$21.2, the analyst price target of CA$21.59 is 1.8% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.