Mineral-Only Strategy And Smart Financial Moves Set To Spike Royalty Revenue Growth

Key Takeaways

• Transition to mineral-only focus and reinvestment in high-margin royalty interests expected to drive high-quality revenue and earnings growth.
  
• Aggressive debt reduction and hedging strategy to manage price volatility and protect margins, coupled with increased dividend payout, highlight financial stability and shareholder value focus.
  
• PHX Minerals' strategies and external challenges may restrict revenue growth and affect stock value, highlighting the volatility in its operational and market risks.

Catalysts

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

• The transition to a mineral-only focus with the sale of non-op working interest and the reinvestment in high-margin royalty interests is expected to sustain high-quality, high-margin royalty volume growth, impacting future revenue growth positively.
  
• A noticeable quarter-over-quarter royalty volume growth of about 40%, attributed partly to high-interest high-impact wells, indicates underlying asset quality and operational efficiency, potentially leading to continued revenue and earnings improvement.
  
• Aggressive debt reduction, from $32.75 million to $28.75 million, strengthens the balance sheet, and is likely to impressively impact net margins positively by reducing interest expenses.
  
• The implementation of a hedging strategy to protect against price volatility provides a downside protection and financial stability, ensuring consistent revenue streams despite commodity price fluctuations, which indirectly supports earnings stability.
  
• The Board’s decision to increase the dividend payout by 33% signals strong confidence in future cash flow generation capabilities, which may attract income-focused investors, potentially impacting the stock’s valuation positively by showcasing a commitment to returning value to shareholders.

Assumptions

• Analysts are assuming PHX Minerals's revenue will grow by 22.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 16.5% today to 28.1% in 3 years time.
• Analysts expect earnings to reach $17.3 million (and earnings per share of $0.48) by about October 2027, up from $5.5 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 11.3x on those 2027 earnings, down from 24.6x today. This future PE is greater than the current PE for the US Oil and Gas industry at 10.4x.
• Analysts expect the number of shares outstanding to decline by 1.68% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.35%, as per the Simply Wall St company report.

Risks

• The macro environment remains challenging with commodity prices suppressed and total rig activity down in the Lower 48, especially in natural gas, which could delay the company's revenue growth from new wells and affect net margins.
  
• PHX Minerals' reliance on the development of new LNG export facilities and increased demand for natural gas to power AI technology as a growth driver introduces risk if these demand catalysts do not materialize as expected, impacting future earnings.
  
• The transition to a mineral-only focus and the divestiture of non-op working interest in favor of royalty volumes, while strategic, exposes the company to the volatility and unpredictability of well development timing, which could affect revenue stability.
  
• The company's aggressive hedging strategy, designed to protect against downside price movements in natural gas and oil, may limit upside potential in a rising commodity price environment, impacting potential earnings enhancements from price increases.
  
• PHX Minerals acknowledges a substantial gap between the company’s asset values and its stock price, suggesting potential market or operational risks not fully accounted for, which could impact investor confidence and limit stock price growth.

Valuation

• The analysts have a consensus price target of $4.5 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 2027, revenues will be $61.5 million, earnings will come to $17.3 million, and it would be trading on a PE ratio of 11.3x, assuming you use a discount rate of 7.4%.
• Given the current share price of $3.62, the analyst's price target of $4.5 is 19.6% 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.