Long-Term Production Gains And Hedging Strategy Are Expected To Support Future Performance

Catalysts

About Prairie Operating

Prairie Operating is an independent exploration and production company focused on developing oil and gas assets in the DJ Basin.

What are the underlying business or industry changes driving this perspective?

• Accelerating production growth from recently completed Noble, Simpson, Rush and Opal/Coalbank pads, alongside the upcoming Blim pad development, is expected to expand volumes over the next 12 to 18 months and increase revenue and EBITDA scale.
• Ongoing optimization programs, including workovers, plunger installations and compression and facilities enhancements, are lifting per well productivity with modest capital outlay, which is expected to structurally lower operating costs per BOE and support margin expansion.
• Disciplined bolt-on acquisitions at low entry costs in a basin seeing rising operator interest are increasing Prairie’s high-quality drilling inventory and reserves, positioning the company for sustained long-term volume growth and enhanced earnings power.
• Long-dated hedges at specified oil and gas prices through early 2028, combined with an expanded credit facility and a supportive bank group, provide greater visibility on cash flows and funding, which may reduce downside volatility and support more stable free cash flow generation.
• Contracted access to modern, lower-emission drilling and frac fleets, along with secured midstream takeaway capacity in an increasingly infrastructure-focused industry environment, may help mitigate service and transportation bottlenecks and support project timing, capital efficiency and net margins.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Prairie Operating's revenue will grow by 73.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from -47.7% today to 52.6% in 3 years time.
• Analysts expect earnings to reach $459.2 million (and earnings per share of $2.72) by about December 2028, up from $-79.4 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 1.0x on those 2028 earnings, up from -1.3x today. This future PE is lower than the current PE for the US Oil and Gas industry at 13.5x.
• 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 11.6%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Prairie remains heavily exposed to long term oil and gas demand, so any acceleration in global decarbonization policies, electric vehicle adoption and alternative energy investment could structurally cap commodity prices and reduce the value of its 106.6 million BOE of proved reserves, pressuring revenue and earnings over time.
• The growth strategy is reliant on continuous drilling, workovers and bolt on M&A in the DJ Basin. If regulatory tightening in Colorado, permitting delays or community pushback increase development costs or constrain activity, the company may struggle to sustain double digit volume growth, weighing on revenue and margins.
• Prairie’s expanded scale depends on successful long term integration of acquired Bayswater assets and future deals. If operational efficiencies, cost reductions and production ramps do not materialize as expected, higher operating expenses per BOE and elevated DD&A could erode net margins and cash generation.
• The company’s hedge program locks in prices through early 2028. While this insulates near term cash flows, it could cause Prairie to under earn in a prolonged high price environment or face step downs when hedges roll off, creating volatility in revenue and earnings beyond the current hedge horizon.
• Execution of capital intensive drilling and optimization programs under a $260 million to $280 million annual CapEx framework depends on continued access to its revolving credit facility and supportive banks. Any tightening in credit markets, borrowing base reductions or higher interest costs could limit growth spending, constrain production, and compress free cash flow and net income.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $4.5 for Prairie Operating 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 $8.0, and the most bearish reporting a price target of just $2.0.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be $872.3 million, earnings will come to $459.2 million, and it would be trading on a PE ratio of 1.0x, assuming you use a discount rate of 11.6%.
  
• Given the current share price of $1.76, the analyst price target of $4.5 is 60.9% 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.