License Extensions And Vietnam Drilling Campaign Will Support Stronger Long Term Cash Generation

Catalysts

About Pharos Energy

Pharos Energy is an independent oil and gas company focused on low cost, cash generative production and growth projects in Vietnam and Egypt.

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

• Execution of the largest Vietnam development and appraisal drilling campaign since initial field development is expected to move production from mere decline management to incremental volume growth from 2025, supporting higher revenue and operating cash flow.
• Recently secured long term license extensions and improved fiscal terms in both Vietnam and Egypt extend economic field lives and enhance project returns, which should translate into stronger net margins and higher reserves backed valuations.
• Formalised farm out process on Vietnam deepwater Blocks 125 and 126, combined with renewed industry appetite for high impact offshore exploration, could bring in a well capitalised partner and unlock material upside to future earnings if a commercial discovery is made.
• Strengthened balance sheet with no debt, growing net cash and continued access to hedging and potential new debt facilities provides financing flexibility for disciplined M and A in higher growth Asian markets. This offers a pathway to scale that can lift absolute earnings and dilute corporate overhead per barrel.
• Improved Egyptian contract economics and expected acceleration of receivables collections from EGPC should convert accounting value into cash, enabling self funded drilling that can stabilise or grow volumes and improve reported free cash flow and dividend sustainability.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Pharos Energy's revenue will grow by 1.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.3% today to 25.0% in 3 years time.
• Analysts expect earnings to reach $33.7 million (and earnings per share of $0.06) by about December 2028, up from $5.5 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $46.4 million in earnings, and the most bearish expecting $12.8 million.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 10.2x on those 2028 earnings, down from 19.6x today. This future PE is greater than the current PE for the GB Oil and Gas industry at 9.3x.
• Analysts expect the number of shares outstanding to grow by 0.42% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.07%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The investment case relies heavily on the success of a complex 6 well campaign in Vietnam, but the appraisal wells target previously undeveloped, technically challenging parts of the fields, and if results disappoint, production may merely decline rather than grow, undermining the expected uplift in revenue and future earnings.
• Egypt remains structurally risky, with a large receivables balance and underwhelming production volumes, so any delay in the anticipated improvement in sector liquidity or slippage in EGPC payments could constrain reinvestment, erode cash conversion and weigh on free cash flow and net margins.
• The frontier deepwater Blocks 125 and 126 are high cost and high risk at a time when global capital for long cycle oil exploration is selective, so failure to secure a strong farm in partner or a dry well outcome would remove a key growth option and could leave the company with sunk costs that dilute returns and depress earnings growth.
• The strategy depends on disciplined reinvestment and potentially debt financed M and A in higher growth Asian markets, but any misstep on acquisition, cost overruns or a sharp downturn in Brent prices despite hedging would expose the business to cyclicality, pressure operating cash flow and compress net margins.
• Although management highlights low breakevens and premium pricing in Vietnam, long term structural pressures from energy transition policies and potential shifts in regional demand could cap oil price upside and reduce the economic life of assets, limiting the ability of new drilling and license extensions to translate into sustained growth in revenue and earnings.

Valuation

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

• The analysts have a consensus price target of £0.51 for Pharos Energy 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 £0.56, and the most bearish reporting a price target of just £0.43.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be $134.7 million, earnings will come to $33.7 million, and it would be trading on a PE ratio of 10.2x, assuming you use a discount rate of 7.1%.
  
• Given the current share price of £0.2, the analyst price target of £0.51 is 61.1% 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.