Accelerating Renewables Will Cripple Hydrocarbon Revenues

Key Takeaways

• Rising energy transition risks and ESG pressures threaten profitability, access to capital, and the long-term viability of legacy hydrocarbon assets.
  
• Heavy reliance on large projects and ambitious growth targets exposes Inpex to operational risks, competitive threats, and uncertain returns.
  
• Expansion in LNG, diversification into low-carbon solutions, strong financial discipline, and prudent investment strategy position INPEX for stable growth amid evolving global energy markets.

Catalysts

Engages in the research, exploration, development, production, and sale of oil, natural gas, and other mineral resources in Japan and internationally.

• The company's future earnings are at risk due to the accelerating global move toward renewable energy and electrification, which will gradually erode long-term oil and gas demand, causing revenue and net cash flow from legacy hydrocarbon assets to trend downward after the early 2030s.
  
• Heightened institutional and regulatory ESG pressures are expected to increase compliance costs and make access to capital more difficult and expensive, which could drive up financing costs and limit Inpex's ability to fund both new projects and sustain current levels of shareholder returns, exerting downward pressure on future margins and ROE.
  
• Inpex's heavy reliance on a small number of very large, capital-intensive projects such as Ichthys and Abadi exposes it to significant project execution risk, potential reserve shortfalls, and long payback periods, making long-term net income and ROIC unusually vulnerable to cost overruns, schedule delays, and commodity price shocks.
  
• Operating cash flow growth targets through 2035 depend on ambitious expansion of LNG projects and the ability to monetize large-scale carbon capture and low-carbon ventures, but these efforts face meaningful commercial and technological uncertainties, casting doubt on the achievement of stated 60% growth and threatening both top-line and bottom-line expectations.
  
• Intensifying global competition from lower-cost producers in the Middle East and emerging US shale, combined with anticipated structural declines in oil demand post-2030, is likely to compress realized prices and erode long-term profitability, directly pressuring both revenue growth and sustainable net margins for Inpex.

Inpex Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Inpex compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Inpex's revenue will decrease by 14.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 20.6% today to 11.4% in 3 years time.
• The bearish analysts expect earnings to reach ¥152.4 billion (and earnings per share of ¥124.75) by about August 2028, down from ¥438.3 billion today. The analysts are largely in agreement about this estimate.
• 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 15.7x on those 2028 earnings, up from 6.4x today. This future PE is greater than the current PE for the JP Oil and Gas industry at 11.9x.
• Analysts expect the number of shares outstanding to decline by 4.04% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.27%, as per the Simply Wall St company report.

Inpex Future Earnings Per Share Growth

Risks

• The company expects a long-term increase in energy demand, especially in Asia, and is prioritizing expansion of its LNG portfolio (with major projects like Ichthys expansion and the Abadi project) which could drive substantial revenue growth and stable long-term cash flows if market demand holds as projected.
  
• INPEX is actively diversifying into low-carbon solutions including CCS, hydrogen, ammonia, and renewable energy, with government support and early project development; this diversification positions the company to create new revenue streams and sustain or expand net margins as global energy transition policies evolve.
  
• The company's financial discipline, as shown by its low debt-to-equity ratios, strong free cash flow generation, and focus on shareholder returns through progressive dividends and buybacks, is likely to support steady earnings and could attract investor support, underpinning the share price.
  
• Global underinvestment in upstream oil and gas may lead to future supply shortages, which could lift commodity prices and benefit INPEX as a well-capitalized producer with development-ready reserves, resulting in higher realized prices and potentially improved profitability.
  
• Management's commitment to a 60% increase in operating cash flow and a 60% reduction in net carbon intensity by 2035, along with disciplined investment in growth projects and cost control, provides a foundation for sustained improvements in core financial metrics like revenue, net income, and return on equity over the next decade.

Valuation

• The assumed bearish price target for Inpex is ¥1940.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Inpex'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 ¥2780.0, and the most bearish reporting a price target of just ¥1940.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ¥1337.4 billion, earnings will come to ¥152.4 billion, and it would be trading on a PE ratio of 15.7x, assuming you use a discount rate of 5.3%.
• Given the current share price of ¥2342.0, the bearish analyst price target of ¥1940.0 is 20.7% lower.
• 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.