Dwindling Oil Demand And Rising Costs Will Squeeze Value

Key Takeaways

• Energy transition trends, regulatory pressures, and ESG mandates threaten long-term demand, capital access, and valuation, putting future margins at risk.
  
• Rising leverage, cost inflation, and declining asset quality could increase operational risks and limit sustainable growth and profitability for Permian Resources.
  
• Operational efficiencies, strategic acquisitions, marketing improvements, regulatory benefits, and strong financials are enhancing profitability, scale, flexibility, and long-term earnings growth.

Catalysts

An independent oil and natural gas company, focuses on the development of crude oil and associated liquids-rich natural gas reserves in the United States.

• The accelerating global shift toward renewables, electrification of transport, and ambitious decarbonization targets threaten to significantly reduce long-term oil demand, which may lead to decreasing revenues and asset impairments for Permian Resources as oil eventually loses share in the global energy mix.
  
• Increasingly stringent ESG-driven investment mandates and rising regulatory pressures to divest from fossil fuels are likely to restrict Permian Resources' access to capital, thereby raising financing costs and reducing valuation multiples, with negative implications for future net margins and return on equity.
  
• High leverage and ongoing acquisition-driven growth raise the risk that Permian Resources may be unable to sufficiently service its debt if commodity prices decline, increasing vulnerability to downturns and impairing long-term earnings growth.
  
• Diminishing productivity in new wells and the exhaustion of top-tier acreage in the Permian Basin could lead to rising per-barrel operating costs and declining cash flows over time, directly impacting free cash flow and depressing future earnings per share.
  
• Persistent cost inflation in oilfield services, combined with intensifying water usage restrictions and heightened scrutiny over wastewater disposal, will likely drive up compliance and operating costs for Permian Resources, eroding industry-wide margins and further compressing profitability over the long term.

Permian Resources Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Permian Resources compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Permian Resources's revenue will grow by 2.9% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 22.4% today to 20.4% in 3 years time.
• The bearish analysts expect earnings to remain at the same level they are now, that being $1.1 billion (with an earnings per share of $1.26). 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 12.0x on those 2028 earnings, up from 8.2x today. This future PE is lower than the current PE for the US Oil and Gas industry at 13.1x.
• Analysts expect the number of shares outstanding to decline by 0.58% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.33%, as per the Simply Wall St company report.

Permian Resources Future Earnings Per Share Growth

Risks

• Continued strong well productivity, operational efficiencies, and record-low completion costs, combined with room for further drilling improvements, are driving lower cost per barrel and boosting free cash flow, supporting higher net margins and earnings per share over time.
  
• Strategic M&A, such as the Apache and Earthstone acquisitions, is increasing Permian Resources' operational scale, asset quality, and inventory depth, enabling production growth and improved operating leverage, which strengthens revenue and cash flow stability long term.
  
• Enhanced marketing strategies and new transportation agreements are projected to significantly improve gas and crude oil netbacks, providing at least a $50 million uplift to future free cash flow and supporting higher revenues and profitability through optimized pricing.
  
• Regulatory tailwinds, such as tax incentives and reduced permitting complexity under the One Big Beautiful Bill Act, are lowering anticipated cash taxes and red tape, reducing capital expenditures and operating expenses, and supporting favorable net margins.
  
• A robust balance sheet, with leverage at approximately one times EBITDA and liquidity of around $3 billion, combined with recent investment-grade ratings, provides flexibility for opportunistic investments, lowers borrowing costs, and enables consistent capital returns to shareholders through buybacks and dividends, supporting long-term earnings growth.

Valuation

• The assumed bearish price target for Permian Resources is $14.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Permian Resources'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 $23.0, and the most bearish reporting a price target of just $14.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $5.5 billion, earnings will come to $1.1 billion, and it would be trading on a PE ratio of 12.0x, assuming you use a discount rate of 7.3%.
  
• Given the current share price of $13.44, the bearish analyst price target of $14.0 is 4.0% higher. The relatively low difference between the current share price and the analyst bearish price target indicates that the bearish analysts believe on average, the company is fairly priced.
  
• 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.