Synergies And $1B Debt Reduction Will Secure Our Future Outlook

Key Takeaways

• Strong capital restructuring and investment-grade ratings could lower capital costs, improve net margins, and enhance earnings.
  
• Strategic hedging and production increases aim to manage risk and boost revenue and cash flow.
  
• Market volatility, operational cost pressures, and expansion plans pose risks to revenue, margins, and cash flow, especially amid uncertain assumptions and competitive pressures.

Catalysts

Operates as an independent natural gas production company in the United States.

• Expand Energy plans to achieve approximately $400 million in synergies by the end of 2025 and $500 million by the end of 2026, which is expected to positively impact net margins.
  
• The company has eliminated approximately $1 billion in gross debt since the merger, which strengthens their capital structure and is likely to enhance earnings by reducing interest expenses.
  
• Expand Energy has joined the S&P 500 Index and achieved investment-grade ratings, which can lead to a lower cost of capital, potentially improving net margins and overall earnings.
  
• The company anticipates a significant increase in free cash flow next year as they exit 2025 at a production rate of 7.2 Bcf/day with plans to grow production to 7.5 Bcf/day by 2026, which should boost revenue.
  
• Their continued focus on hedging with 740 Bcf of new hedges added will manage commodity price risk, allowing them to capitalize on market volatility while securing predictable cash flows to underpin free cash flow and earnings.

Expand Energy Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Expand Energy's revenue will grow by 31.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from -16.8% today to 20.6% in 3 years time.
• Analysts expect earnings to reach $2.0 billion (and earnings per share of $8.98) by about April 2028, up from $-714.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $2.8 billion in earnings, and the most bearish expecting $1.4 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.5x on those 2028 earnings, up from -35.0x today. This future PE is greater than the current PE for the US Oil and Gas industry at 11.8x.
• 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 6.94%, as per the Simply Wall St company report.

Expand Energy Future Earnings Per Share Growth

Risks

• Recent market volatility and lower-than-expected spot prices could negatively impact revenue projections if similar conditions persist, especially since the company is operating with a mid-cycle gas price projection of $3.50 to $4 and faces market uncertainties.
  
• Persistent tariffs on imported materials, such as casing, could increase operational costs once contracts are renegotiated, potentially compressing net margins if not offset by efficiencies or price increases.
  
• The dependency on forward-looking statements and the inherent uncertainties in their assumptions pose risks to expected financial performance, potentially impacting earnings if assumptions do not materialize as forecasted.
  
• Expansion plans may increase capital spending, especially with planned additional productive capacity, which could strain financial resources and impact free cash flow if gas prices do not align with expectations.
  
• Increased competition and potential overproduction risks in the Haynesville region could affect the company's ability to maintain favorable margins, especially in light of uncertain market demands and varying price realizations.

Valuation

• The analysts have a consensus price target of $123.519 for Expand 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 $170.0, 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 $9.7 billion, earnings will come to $2.0 billion, and it would be trading on a PE ratio of 21.5x, assuming you use a discount rate of 6.9%.
  
• Given the current share price of $107.47, the analyst price target of $123.52 is 13.0% 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.