4-Mile Laterals Will Optimize Capital Efficiency And Operations

Key Takeaways

• Shifting to longer laterals and optimized drilling increases capital efficiency, enhancing returns and reducing development costs, positively impacting margins and earnings.
  
• Cost reduction through operational improvements and flexible development plans supports shareholder returns, consistent cash flow, and financial performance stability amidst market volatility.
  
• Market volatility and strategic reductions in operational activity could limit Chord Energy's revenue growth, impacting earnings in unfavorable conditions.

Catalysts

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

• Chord Energy's decision to focus more heavily on long laterals, especially 4-mile laterals, is expected to enhance capital efficiency by reducing the cost to develop the same amount of resources by 24%, thereby improving breakeven pricing and strengthening returns. This initiative can significantly impact net margins and ultimately contribute to stronger earnings.
  
• The company is actively working on reducing operational costs, particularly lease operating expenses (LOE), through efficiency improvements such as artificial lift optimization and logistics enhancements. These efforts are poised to impact net profit margins positively.
  
• Chord Energy's shareholder returns strategy, which includes share buybacks, should help improve earnings per share (EPS) due to a reduced share count while maintaining leverage, mainly if market conditions allow them to continue repurchasing shares at significant levels.
  
• The company has substantial flexibility in its development plan, allowing Chord to moderate activity levels based on market conditions without impacting production targets in the short term. This operational flexibility should support consistent free cash flow generation, even in volatile pricing environments, positively affecting overall financial performance.
  
• Chord Energy's focus on reconfiguring acreage and improving drilling contract efficiencies, including the shift to longer laterals and more optimized well spacing, is expected to increase returns on capital and decrease per-barrel costs, supporting future growth in revenues and profits.

Chord Energy Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Chord Energy's revenue will decrease by 3.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 17.2% today to 18.9% in 3 years time.
• Analysts expect earnings to reach $848.1 million (and earnings per share of $15.47) by about May 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 $642.4 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.6x 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 11.3x.
• 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 6.25%, as per the Simply Wall St company report.

Chord Energy Future Earnings Per Share Growth

Risks

• The deteriorating pricing outlook and increased market volatility could negatively affect Chord Energy's revenue and profitability, as the company may face challenges in maintaining favorable conditions for its operations.
  
• A decision to maintain a lower level of activity by operating only one frac crew could lead to reduced production and potentially lower revenues if oil prices do not improve.
  
• The potential decision to forgo reinstating the second frac crew due to current strip prices suggests that Chord might prioritize maintaining low leverage over enhancing production, which could limit revenue growth.
  
• The company's strategy to allocate capital efficiently and potentially delay activity increases could result in lower-than-expected production volumes, impacting future earnings under prolonged unfavorable market conditions.
  
• The risk of non-reoccurring production tax adjustments and volatile natural gas and NGL price realizations could introduce uncertainties in net margins and impact future earnings.

Valuation

• The analysts have a consensus price target of $133.867 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 $183.0, and the most bearish reporting a price target of just $100.0.
  
• 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 $848.1 million, and it would be trading on a PE ratio of 13.6x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of $90.61, the analyst price target of $133.87 is 32.3% 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.