Tariff And OPEC Risks Will Depress Future Profitability

Key Takeaways

• Cyclical industry pressures and macroeconomic risks may impact Liberty Energy's revenue and profitability due to volatile commodity prices and decreased service activity.
  
• Operational costs may rise from tariff-related inflation, affecting net margins and potentially hindering future earnings growth amidst strategic market and technology investments.
  
• Strategic investments and advanced technologies increase efficiency, stabilize revenue streams, and enhance customer relations, supporting margins amid market fluctuations.

Catalysts

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

• Liberty Energy may face pressure on revenue growth due to the cyclical nature of the oil and gas industry, combined with potential impacts from tariff negotiations and OPEC+ production strategies, which could lead to unpredictable commodity price fluctuations.
  
• The possibility of macroeconomic risks causing lower oil production in North America could lead to decreased service activity, which would negatively impact Liberty's revenue projections.
  
• Tariff-related inflationary impacts on engines and other equipment components could elevate operational costs, putting pressure on net margins and potentially squeezing profitability.
  
• Despite current high utilization rates, future fleet modernization and digiFleet commitments may not translate into anticipated revenue if North American producers react adversely to macroeconomic uncertainties, thus decreasing expected earnings growth.
  
• The strategic investments in new markets and technology innovations may not deliver the expected returns if headwinds prevail, affecting the company’s revenue and profitability, and thus limiting its ability to achieve consensus growth targets.

Liberty Energy Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Liberty Energy compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Liberty Energy's revenue will decrease by 3.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 6.0% today to 0.3% in 3 years time.
• The bearish analysts expect earnings to reach $9.6 million (and earnings per share of $0.06) by about July 2028, down from $254.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 215.4x on those 2028 earnings, up from 8.4x today. This future PE is greater than the current PE for the US Energy Services industry at 11.3x.
• Analysts expect the number of shares outstanding to decline by 2.04% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.5%, as per the Simply Wall St company report.

Liberty Energy Future Earnings Per Share Growth

Risks

• Liberty Energy's deployment of advanced technology systems, fleet modernization, and AI-driven maintenance strategies may lead to increased operational efficiencies and reduce the costs of production, potentially maintaining profit margins even in challenging market conditions.
  
• The company's strategic investments in power generation and the acquisition of IMG to expand into the PJM utility market may diversely stabilize revenue streams and mitigate risks associated with fluctuating oil and gas markets.
  
• Liberty's robust supply chain management and proactive tariff mitigation strategies may alleviate cost pressures on inputs, supporting stable earnings despite external economic challenges.
  
• Collaboration and innovation in engineering solutions for customers' completion strategies are likely to strengthen customer relationships and enhance future revenue through premium services and higher customer retention.
  
• Managing a strong balance sheet and capital discipline allows for sustained strategic investments and the flexibility to navigate potential downturns, likely strengthening net margins and earnings resilience in uncertain market environments.

Valuation

• The assumed bearish price target for Liberty Energy is $11.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Liberty Energy's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $24.0, and the most bearish reporting a price target of just $11.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $3.8 billion, earnings will come to $9.6 million, and it would be trading on a PE ratio of 215.4x, assuming you use a discount rate of 7.5%.
• Given the current share price of $13.25, the bearish analyst price target of $11.0 is 20.5% lower.
• 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.