Integration Of Alberta Montney Assets And Pembina Partnership Will Enhance Future Production

Key Takeaways

• Strategic operational improvements and partnerships are boosting production and potential revenue, enhancing both flexibility and cost-efficiency.
  
• Share repurchases supported by operational gains aim to grow earnings per share by reducing share count.
  
• High financial risk from capital expenditures and reliance on key assets and technologies could affect production, revenue, and margins amidst commodity price volatility.

Catalysts

A Canadian oil and gas company that explores, develops, and produces oil and gas properties in Canada.

• Veren's successful integration of Alberta Montney assets and continued focus on operational efficiencies are anticipated to boost production levels, thereby increasing potential revenue growth in the future.
  
• The company's investment in gas egress infrastructure and infield optimization projects is expected to enhance operational flexibility and reduce downtime, thus potentially improving net margins by lowering operational costs.
  
• Veren's strategic long-term infrastructure partnership with Pembina Gas Infrastructure is likely to provide further operational efficiencies and cost benefits, which can contribute to improved margins and earnings.
  
• The optimization of completions designs, such as single-point entry completions, is generating better-than-expected production results, suggesting a positive impact on production volumes and future revenue streams.
  
• Veren's commitment to returning excess cash flow to shareholders and continuing share repurchases is likely to support earnings per share (EPS) growth, driven by reduced share count and sustained operational performance.

Veren Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Veren's revenue will grow by 2.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.1% today to 11.8% in 3 years time.
• Analysts expect earnings to reach CA$512.0 million (and earnings per share of CA$0.74) by about March 2028, up from CA$283.9 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting CA$653 million in earnings, and the most bearish expecting CA$371 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.7x on those 2028 earnings, down from 19.8x today. This future PE is greater than the current PE for the CA Oil and Gas industry at 12.6x.
• Analysts expect the number of shares outstanding to decline by 1.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.94%, as per the Simply Wall St company report.

Veren Future Earnings Per Share Growth

Risks

• The reliance on improving production technology, such as the single-point entry completion designs and sliding sleeve tests, could pose a risk if these methods do not consistently deliver the promised results, potentially impacting production volumes and thus revenue.
  
• The company's significant planned capital expenditures of $1.48 billion to $1.58 billion, largely weighted to the first half of the year, increase financial risk if expected returns on these investments are not realized, which could affect net margins.
  
• The focus on returning 60% of excess cash flow to shareholders through dividends and share repurchases may limit available funds for reinvestment into business operations or debt reduction, potentially impacting long-term earnings growth.
  
• Although Veren has a strategic asset base, a high dependence on a few key assets, such as the Alberta Montney and Kaybob Duvernay, means that any operational or market disruptions in these areas could significantly affect production levels and revenue.
  
• Any volatility in commodity prices, particularly WTI crude and AECO gas prices, could adversely affect projected cash flows and profit margins, as financial forecasts are based on specific price assumptions.

Valuation

• The analysts have a consensus price target of CA$11.486 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$9.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$4.3 billion, earnings will come to CA$512.0 million, and it would be trading on a PE ratio of 16.7x, assuming you use a discount rate of 7.9%.
• Given the current share price of CA$9.17, the analyst price target of CA$11.49 is 20.2% higher.
• 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.