Future Partnerships With National Cement And AI Data Centers Will Strengthen Outlook

Key Takeaways

• Strategic partnerships and innovative energy solutions are poised to drive revenue growth and diversify California Resources' income streams.
  
• Operational efficiencies and share buybacks signal a focus on enhanced shareholder value and sustainable earnings potential.
  
• Stock underperformance, permitting uncertainties, lockup expiration impacts, integration risks, and regulatory reliance challenge California Resources' future revenue and investor confidence.

Catalysts

Operates as an independent energy and carbon management company in the United States.

• California Resources has significant growth opportunities in its Carbon TerraVault (CTV) business, supported by high demand and strategic partnerships such as with National Cement. This is expected to drive future revenue growth.
  
• The company is leveraging its behind-the-meter power capacity to enter long-term agreements with AI data centers, potentially increasing cash flow and expanding revenue streams from power agreements.
  
• The post-Era merger has led to substantial cost reductions and synergies, improving net margins through operational efficiency, G&A savings, and supply chain optimization.
  
• The company's strategic focus on buying back shares under its authorized program indicates a commitment to improving earnings per share (EPS) and enhancing shareholder value over time.
  
• With a strong hedging strategy and operational efficiencies, California Resources is positioned for sustained cash flow generation, underlining robust future earnings potential and shareholder returns.

California Resources Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming California Resources's revenue will grow by 3.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 12.8% today to 8.5% in 3 years time.
• Analysts expect earnings to reach $275.0 million (and earnings per share of $4.27) by about May 2028, down from $376.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $408.1 million in earnings, and the most bearish expecting $67 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 27.4x on those 2028 earnings, up from 8.6x 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 6.56%, as per the Simply Wall St company report.

California Resources Future Earnings Per Share Growth

Risks

• The company's stock underperformance relative to peers, possibly influenced by market conditions and competitive landscape, could negatively impact its ability to attract and retain investor confidence, affecting stock price and valuation.
  
• Uncertainties surrounding the permitting process for new projects, such as carbon sequestration and related infrastructure, pose risks to project timelines and future revenue from these initiatives.
  
• Potential impact from the lockup expiration of shares held by major shareholders, which could lead to increased market volatility and stock price pressure, affecting investor sentiment and market perception.
  
• Execution risks associated with the integration of new acquisitions, cost synergies, and operational efficiencies may fail to materialize as projected, impacting net margins and overall profitability.
  
• Reliance on favorable regulatory developments for key projects, including carbon management and infrastructure expansion, which may face delays or opposition, potentially impacting future earnings and growth outlook.

Valuation

• The analysts have a consensus price target of $56.154 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 $75.0, and the most bearish reporting a price target of just $36.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $3.2 billion, earnings will come to $275.0 million, and it would be trading on a PE ratio of 27.4x, assuming you use a discount rate of 6.6%.
• Given the current share price of $35.51, the analyst price target of $56.15 is 36.8% 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.