Aera Merger And Carbon Management Positions CRC For Robust Revenue And Net Margin Growth

Key Takeaways

• The Aera merger and focus on carbon management, including CCS projects, are set to enhance revenue growth and open new revenue streams.
  
• Strong hedge book and low-decline assets position CRC well against market volatility, ensuring steady earnings and cash flow.
  
• Risks including economic conditions, California permitting challenges, Aera merger execution, and dependence on CCS projects may impact earnings and growth.

Catalysts

Operates as an independent oil and natural gas exploration and production, and carbon management company in the United States.

• The Aera merger is expected to double daily production volumes, enhancing cash flow capacity and scale, which will impact future revenue growth significantly.
  
• CRC aims to achieve $235 million in total synergies from the Aera merger within the next 15 months, particularly through refinancing Aera's debt and operational efficiencies, which is likely to improve net margins.
  
• The company is focusing on its carbon management business to decarbonize California, including the development of carbon capture and storage (CCS) projects, which could open new revenue streams and impact earnings positively.
  
• A strong hedge book and low-decline assets provide CRC with a financial fortress against market volatility, ensuring sustainability of earnings and a steady cash flow.
  
• CRC’s strategy to support the growth of data centers by offering carbon-free baseload power solutions aligns with California's Net Zero ambitions, potentially impacting future revenue growth as demand for low-carbon power increases.

Assumptions

• Analysts are assuming California Resources's revenue will grow by 21.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.3% today to 20.0% in 3 years time.
• Analysts expect earnings to reach $810.7 million (and earnings per share of $6.73) by about September 2027, up from $164.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.5x on those 2027 earnings, down from 26.2x today. This future PE is greater than the current PE for the US Oil and Gas industry at 9.8x.
• Analysts expect the number of shares outstanding to grow by 29.35% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.49%, as per the Simply Wall St company report.

Risks

• The current economic developments pose a risk to the sustainability of earnings, which could impact net margins, especially if the global and domestic economic conditions worsen.
  
• California permitting headwinds could restrict the company’s growth and operational efficiency, potentially affecting revenue and earnings as regulatory challenges persist.
  
• The success of the Aera merger and achieving the forecasted $235 million in total synergies carry execution risk. Failure to meet these targets could affect net margins and overall profitability.
  
• Dependence on the development of carbon management and carbon capture and sequestration (CCS) projects, which are subject to regulatory approval and technological effectiveness, poses a risk to future revenue streams and earnings if these projects face delays or do not realize expected benefits.
  
• The strategy to grow cash flow per share could be impacted by fluctuations in oil prices, operational difficulties, or inefficiencies in integrating Aera's operations, which would directly affect net margins and earnings.

Valuation

• The analysts have a consensus price target of $62.57 for California Resources 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 $65.0, and the most bearish reporting a price target of just $55.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $4.1 billion, earnings will come to $810.7 million, and it would be trading on a PE ratio of 18.5x, assuming you use a discount rate of 7.5%.
• Given the current share price of $48.14, the analyst's price target of $62.57 is 23.1% 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.