Natural Gas Price Increase And Undrilled Inventory Will Drive Future Opportunities

Key Takeaways

• Improved natural gas prices and strategic asset locations could enhance revenue and future earnings through increased industry activity.
  
• Debt reduction via noncore asset sales and a strong hedging program may enhance financial stability and improve net margins.
  
• Reduction in industry CapEx and rig counts, lower gas prices, and decreased reserves may lead to volatile production, affecting PHX Minerals' future revenue and financial stability.

Catalysts

Operates as a natural gas and oil mineral company in the United States.

• The anticipated improvement in natural gas prices, which have risen above $4, is expected to increase industry activity on PHX Minerals' strategically located assets, potentially boosting revenue.
  
• The company's inventory of over 2,400 undrilled probable locations and robust well conversion rates indicate potential for future production growth, which could positively impact future earnings.
  
• The sale of noncore, nonproducing mineral assets for $8 million to reduce debt improves the balance sheet, decreasing interest expenses and potentially improving net margins.
  
• Maintaining a strong hedging program supports financial stability and provides an opportunity to protect against price volatility, thereby stabilizing or improving net margins.
  
• The ongoing review of strategic alternatives represents an opportunity to unlock value through potential strategic partnerships or acquisitions, which may enhance future revenue and earnings.

PHX Minerals Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming PHX Minerals's revenue will grow by 23.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.1% today to 39.8% in 3 years time.
• Analysts expect earnings to reach $24.2 million (and earnings per share of $0.66) by about March 2028, up from $2.3 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 10.0x on those 2028 earnings, down from 64.4x today. This future PE is lower than the current PE for the US Oil and Gas industry at 12.7x.
• Analysts expect the number of shares outstanding to grow by 0.49% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.59%, as per the Simply Wall St company report.

PHX Minerals Future Earnings Per Share Growth

Risks

• The reduced industry CapEx budgets and lower rig counts due to challenging macro conditions have negatively impacted natural gas production, potentially affecting future revenue and net margins.
  
• A decrease in total proved reserves by 11% and in royalty reserves by 9%, primarily due to a significant drop in gas prices, may impact future earnings and the overall financial health of the company.
  
• The lack of control over the timing of well development introduces potential volatility in production volumes, which could lead to unpredictable revenue and net earnings fluctuations.
  
• The decrease in net income to $109,000 or $0.00 per share, alongside a noncash mark-to-market adjustment resulting in a $1.5 million expense, indicates susceptibility to financial market fluctuations affecting overall profitability.
  
• While debt has been reduced, PHX's trailing debt to 12-month adjusted EBITDA ratio was 1.38x at year's end, indicating potential financial leverage risks that could impact net earnings and cash flow stability.

Valuation

• The analysts have a consensus price target of $5.125 for PHX Minerals based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $60.9 million, earnings will come to $24.2 million, and it would be trading on a PE ratio of 10.0x, assuming you use a discount rate of 7.6%.
  
• Given the current share price of $3.97, the analyst price target of $5.12 is 22.5% 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.