Efficiency Gains In Alberta Montney And Kaybob Could Boost Growth, But Infrastructure Constraints Pose Risks

Key Takeaways

• Investments in facility improvements and well design changes are expected to enhance production efficiency, reducing costs and boosting future revenue growth.
  
• Efficiency gains and production capacity increases support potential earnings growth, with a 5-year plan to significantly boost production and shareholder returns.
  
• Operational and financial challenges, including infrastructure constraints and reliance on optimistic oil price assumptions, may threaten Veren's revenue growth and profitability.

Catalysts

Explores, develops, and produces oil and gas properties in Canada and the United States.

• Veren is addressing third-party facility downtime and its own infrastructure constraints by investing incremental capital to improve facilities' capacities, which should enhance production efficiency and positively impact future revenue growth.
  
• The company has identified efficiencies in its Alberta Montney assets and switched back to a single point entry design for well completions, which is expected to improve production results and reduce costs, potentially improving net margins.
  
• Significant efficiency gains have been achieved in the Kaybob region, reducing drilling days per 1,000 meters, which should lower operational costs and potentially improve net margins and earnings.
  
• Veren plans to bring an additional 7-well pad online in early 2025 and increase overall production capacity, which is expected to drive revenue higher.
  
• The company's 5-year plan outlines a path to grow production to 250,000 BOE per day by 2029, generating significant excess cash flow, which could enhance earnings and shareholder returns.

Veren Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Veren's revenue will grow by 3.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 11.5% today to 9.6% in 3 years time.
• Analysts expect earnings to reach CA$406.3 million (and earnings per share of CA$0.63) by about December 2027, down from CA$441.8 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 23.1x on those 2027 earnings, up from 9.9x today. This future PE is greater than the current PE for the CA Oil and Gas industry at 10.9x.
• Analysts expect the number of shares outstanding to grow by 1.76% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.93%, as per the Simply Wall St company report.

Veren Future Earnings Per Share Growth

Risks

• Production challenges related to third-party facility downtime and infrastructure constraints may impact Veren's future revenue and net margins if not addressed promptly.
  
• Recent well underperformance at the Alberta Montney assets, particularly with their plug-and-perf completions design not meeting expectations, suggests potential risks to future production levels and revenue projections.
  
• The company’s reliance on a $70 per barrel WTI price assumption in their 2025 budget poses a financial risk; weakening commodity prices could directly impact their excess cash flow and earnings.
  
• Incremental capital investment in infrastructure, especially in the Alberta Montney, increases CapEx spend for 2025, which could pressure net margins and free cash flow if operational efficiencies are not realized.
  
• Potential production revisions, particularly in gas volumes for 2025, may indicate underestimated risks to Veren's revenue growth and could cast doubt on long-term production targets if current issues persist.

Valuation

• The analysts have a consensus price target of CA$11.54 for Veren 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$14.0, and the most bearish reporting a price target of just CA$10.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be CA$4.3 billion, earnings will come to CA$406.3 million, and it would be trading on a PE ratio of 23.1x, assuming you use a discount rate of 7.9%.
  
• Given the current share price of CA$7.08, the analyst's price target of CA$11.54 is 38.6% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• 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.