Integration With Enerplus And Longer Laterals Will Optimize Future Operations

Key Takeaways

• Integration and strategic shifts towards longer laterals are improving operational efficiency, leading to enhanced net margins and earnings.
  
• Strong free cash flow generation and strategic share repurchases aim to improve capital efficiency and boost earnings per share.
  
• Heavy reliance on oil prices and strategic focus on share repurchases could limit financial flexibility and long-term growth, with risks from operational changes and environmental regulations.

Catalysts

Operates as an independent exploration and production company in the United States.

• Chord Energy's integration with Enerplus has yielded substantial operational and corporate synergies, optimizing costs and enhancing operational efficiency, which could lead to improved net margins in the future.
  
• The implementation of long laterals and conservative spacing has not only lowered breakeven points but also extended inventory life, potentially driving more sustainable free cash flow and enhancing earnings.
  
• The focus on capital-efficient development and operational improvements is expected to result in continued strong free cash flow generation, positively impacting overall earnings.
  
• The company's strategic shift towards longer laterals, including an increased focus on 3-mile and 4-mile laterals, is expected to drive improved capital efficiency, thus enhancing future net margins and earnings.
  
• Share repurchases aim to capitalize on the current value disconnect, leading to potential per-share growth across key metrics, thereby boosting earnings per share (EPS).

Chord Energy Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Chord Energy's revenue will decrease by 2.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 17.2% today to 19.6% in 3 years time.
• Analysts expect earnings to reach $887.1 million (and earnings per share of $16.36) by about April 2028, up from $845.2 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $1.0 billion in earnings, and the most bearish expecting $759.3 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.9x on those 2028 earnings, up from 6.4x today. This future PE is greater than the current PE for the US Oil and Gas industry at 11.4x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.79%, as per the Simply Wall St company report.

Chord Energy Future Earnings Per Share Growth

Risks

• The company's performance depends heavily on oil prices being at or above their benchmark, which is currently set at $70 per barrel. Any decline in oil prices could adversely affect revenues and free cash flow.
  
• Chord's non-operated Marcellus position, while providing upside from gas price improvements, is not a core strategic asset, and any downturn in natural gas prices could negatively impact earnings.
  
• The cost and execution risks associated with transitioning to 3-mile and 4-mile laterals, despite potential efficiency gains, could increase capital expenditures if not managed effectively, impacting net margins.
  
• The company's significant focus on share repurchases as a valuation disconnect without simultaneously reducing debt could limit financial flexibility and affect long-term earnings potential.
  
• Potential environmental regulations or operational incidents in the Williston Basin could increase operating expenses and impact net margins and earnings.

Valuation

• The analysts have a consensus price target of $140.562 for Chord 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 $186.0, and the most bearish reporting a price target of just $106.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $4.5 billion, earnings will come to $887.1 million, and it would be trading on a PE ratio of 13.9x, assuming you use a discount rate of 6.8%.
• Given the current share price of $90.84, the analyst price target of $140.56 is 35.4% 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.