2025 Rig Increase And Acquisitions Will Secure Future Potential

Key Takeaways

• Mach Natural Resources aims to grow through strategic acquisitions during market distress, focusing on high-return projects and maintaining low costs to maximize earnings.
  
• By increasing rig count and acquiring cash-flowing assets, Mach plans to boost cash flow and revenue, supporting enhanced distributions and operational scale-up.
  
• Reliance on acquisitions, low reinvestment, and exposure to commodity prices create potential vulnerabilities and risks to future revenue and financial flexibility.

Catalysts

An independent upstream oil and gas company, focuses on the acquisition, development, and production of oil, natural gas, and natural gas liquids reserves in the Anadarko Basin region of Western Oklahoma, Southern Kansas, and the panhandle of Texas.

• Mach Natural Resources is planning to increase its rig count from two to three in 2025 due to improved natural gas prices, which should boost their operating cash flow and, consequently, their production and revenue.
  
• The company has a strategic focus on acquiring and developing high-return projects with a minimum of 50% IRRs, optimized by maintaining a low reinvestment rate, likely enhancing net margins by keeping costs low and increasing earnings.
  
• By acquiring assets such as midstream facilities purchased for $65 million that contributed $78 million of EBITDA in 2024, they enhance their earnings and cash flow, which supports their variable distributions.
  
• Their strategy of acquiring cash flowing assets during industry distress at prices less than PDP PV-10 allows them to increase their distribution accretive acquisitions, bolstering future earnings and maximizing distributions.
  
• With plans to potentially partner with PE firms or small public companies in larger acquisitions, they aim to grow through strategic acquisitions, increase operational scale, and elevate earnings by capitalizing on a favorable market environment.

Mach Natural Resources Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Mach Natural Resources's revenue will decrease by 1.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 19.6% today to 23.4% in 3 years time.
• Analysts expect earnings to reach $210.0 million (and earnings per share of $1.75) by about May 2028, up from $185.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.0x 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 11.6x.
• 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 7.39%, as per the Simply Wall St company report.

Mach Natural Resources Future Earnings Per Share Growth

Risks

• The company's growth approach heavily relies on acquisitions, leading to potential vulnerabilities if the market conditions shift or if valuable acquisition opportunities become scarce, possibly impacting future revenue growth.
  
• Their strategy of maintaining low reinvestment rates to maximize cash distributions might limit the ability to sustainably grow production or adapt to evolving market conditions, which could affect long-term earnings.
  
• The company is exposed to commodity price fluctuations, particularly in natural gas and oil, and any significant downturns in these prices could adversely affect profitability and operating cash flow.
  
• The heavy emphasis on maintaining low leverage to capitalize on volatile markets could pose a risk if credit markets tighten or interest rates rise, which might impact their financial flexibility and cost of capital.
  
• Given the company’s reliance on infrastructure for extraction and processing, any operational challenges or inefficiencies could lead to increased costs and reduced net margins.

Valuation

• The analysts have a consensus price target of $23.5 for Mach Natural 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 $27.5, and the most bearish reporting a price target of just $18.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $896.0 million, earnings will come to $210.0 million, and it would be trading on a PE ratio of 20.0x, assuming you use a discount rate of 7.4%.
  
• Given the current share price of $13.43, the analyst price target of $23.5 is 42.9% 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.