Power And Data Center Expansion Will Create Options Amid Volatility

Key Takeaways

• Liberty Energy's technological advancements and vertical integration are enhancing efficiency and reducing costs, likely boosting margins and earnings through operational improvements.
  
• Expansion into new markets like industrial electrification and strategic investments in modernization and digitization bolster Liberty's long-term growth and competitive position.
  
• Volatility in oil prices and geopolitical risks threaten revenues, while investments in new technologies pose potential financial stability challenges for Liberty Energy.

Catalysts

Provides hydraulic fracturing services and related technologies to onshore oil and natural gas exploration, and production companies in North America.

• Liberty Energy is experiencing strong demand for its services due to excess demand across the energy sector, which could lead to revenue growth as more customers align with Liberty's top-tier services.
  
• The company is leveraging technological advancements and vertical integration to enhance operational efficiency and lower costs, potentially improving net margins.
  
• Liberty Energy is expanding its power services into new markets, including industrial electrification, data centers, and commercial projects, which can drive long-term revenue growth.
  
• Investments in fleet modernization and real-time data analytics are expected to extend equipment lifespan and maximize efficiency, potentially improving earnings by reducing maintenance costs and enhancing operational performance.
  
• The integration of IMG and strategic investments in power generation and digitization are set to enhance Liberty Energy's competitive edge, supporting future earnings growth through new market opportunities and increased demand for distributed power systems.

Liberty Energy Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Liberty Energy's revenue will grow by 2.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 6.0% today to 3.5% in 3 years time.
• Analysts expect earnings to reach $159.3 million (and earnings per share of $1.0) by about April 2028, down from $254.2 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $294.7 million in earnings, and the most bearish expecting $78.9 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.2x on those 2028 earnings, up from 7.8x today. This future PE is greater than the current PE for the US Energy Services industry at 10.5x.
• Analysts expect the number of shares outstanding to decline by 2.82% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.63%, as per the Simply Wall St company report.

Liberty Energy Future Earnings Per Share Growth

Risks

• The cyclical nature of the oil and gas industry and potential adjustments in OPEC+ production strategies could lead to volatility in commodity prices, creating uncertainty in future revenues and profitability.
  
• Tariffs and geopolitical tensions present risks that could lead to increased business costs, affecting net margins if not successfully mitigated.
  
• The potential decrease in North American oil production due to macroeconomic risks or shifts in market dynamics could result in reduced service activity, impacting Liberty’s revenue stream.
  
• Significant investment in new technologies and expansions, such as power generation and digital platforms, may not yield expected returns if market conditions change unfavorably, potentially straining cash flow and earnings.
  
• The substantial financial complexity of deploying new equipment and technology ahead of securing revenue contracts poses a risk to financial stability, affecting net income and balance sheet strength if anticipated agreements are delayed or fall through.

Valuation

• The analysts have a consensus price target of $16.577 for Liberty 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 $25.0, and the most bearish reporting a price target of just $11.0.
• 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 $159.3 million, and it would be trading on a PE ratio of 19.2x, assuming you use a discount rate of 7.6%.
• Given the current share price of $12.23, the analyst price target of $16.58 is 26.2% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• 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.