Legacy Hydrocarbons Will Falter Under Decarbonization Pressures

Key Takeaways

• Heavy dependence on fossil fuel assets and slow renewable transition expose Inpex to declining demand, intensifying competition, and greater regulatory risks amid global decarbonization.
  
• Accounting strategies and large new projects face high volatility and escalating costs, threatening future earnings stability, profitability, and cash flow.
  
• Ongoing LNG and oil demand, project expansion, portfolio diversification, and profitability initiatives position Inpex for stable growth, earnings resilience, and strong shareholder returns.

Catalysts

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

• Despite Inpex's stable operations at Ichthys LNG and project ramp-up, the company's heavy reliance on long-lived hydrocarbon assets in Oceania and Asia exposes future revenue and margins to structurally declining demand for oil and LNG as global decarbonization policies and accelerated electrification reduce consumption over the coming decades.
  
• The long-term Profit Booster 500 accounting strategy, which depends on FX gains from capital reduction and investment incentives, is not only non-recurring, but also vulnerable to oil price and exchange rate fluctuations; as these catalysts diminish and renewables eat into the LNG market, Inpex's reported earnings are likely to become less repeatable and structurally lower.
  
• Upcoming major capital outlays, such as the Abadi project, face high cost escalation risk, inherent complexity of new build LNG/CCS projects, and tougher Indonesian government negotiations on fiscal terms; this combination increases the risk of negative free cash flow, lower project IRRs, and higher execution risk, limiting future value creation relative to current valuation.
  
• Inpex's progress in renewables and CCS remains slow and under-invested relative to peer group decarbonization efforts, meaning future earnings, revenue and margins remain excessively exposed to fossil fuel prices and volumes at a time when long-term global energy demand is tilting toward lower-carbon solutions and new competitors are gaining share.
  
• Increasing adoption of carbon pricing and more stringent ESG regulations will steadily drive up costs of capital and erode net margins, while the company's older upstream portfolio creates mounting decommissioning and remediation liabilities that will further squeeze profitability and constrain future dividend growth.

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 14.2% 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 ¥153.0 billion (and earnings per share of ¥125.3) by about September 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 16.7x on those 2028 earnings, up from 7.1x today. This future PE is greater than the current PE for the JP Oil and Gas industry at 12.3x.
• Analysts expect the number of shares outstanding to decline by 1.81% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.33%, as per the Simply Wall St company report.

Inpex Future Earnings Per Share Growth

Risks

• Continued robust and growing demand for LNG and oil in Asia, particularly in developing economies, underpins strong sales volumes for Inpex's key projects like Ichthys and Abadi, supporting sustained revenue and cash flow growth over the long term.
  
• The company has implemented structural profitability enhancements, notably the Profit Booster 500 initiative, which is projected to contribute approximately ¥50 billion annually in profit over 10 years through recurring foreign exchange gains and investment incentives, materially strengthening net margin and earnings stability.
  
• Ongoing expansion and ramp-up of major LNG projects such as Abadi-a project with significant buyer interest and government support-is set to increase production capacity and revenue base, while resilience in the oil and gas operating environment improves earnings visibility through multi-year upstream investments.
  
• Strategic diversification into carbon capture and storage, hydrogen, and renewables is accelerating, with Inpex already securing government funding and project approvals in Japan and Australia, diversifying income streams and enhancing long-term EBITDA margins as the energy transition unfolds.
  
• Strong shareholder returns policy-highlighted by a progressive dividend increase to ¥100 and substantial share buybacks-demonstrates management's confidence in future cash generation and profit sustainability, which supports the share price through sustained net profit and attractive return of capital.

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 ¥2900.0, 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 ¥1342.0 billion, earnings will come to ¥153.0 billion, and it would be trading on a PE ratio of 16.7x, assuming you use a discount rate of 5.3%.
  
• Given the current share price of ¥2615.0, the bearish analyst price target of ¥1940.0 is 34.8% 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.