Capital Efficiency And Drilling Success In Delaware Basin Will Improve Future Operations

Key Takeaways

• Efficiency improvements and cost leadership are driving down development costs, potentially boosting net margins and cash flow growth.
  
• Strategic acquisitions and technology advancements enhance production capabilities, supporting long-term revenue growth and inventory replacement initiatives.
  
• Reliance on M&A and regional risks could affect margins and earnings, while limited emphasis on dividends may impact shareholder returns.

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.

• Successful execution of the Delaware Basin drilling program and capital efficiency improvements are expected to generate significant free cash flow per share growth, impacting revenue and earnings.
  
• Continued focus on cost leadership and efficiency improvements has driven down development and completions (D&C) costs, potentially increasing net margins.
  
• Strategic acquisitions and realignment of assets, including $1.2 billion worth of M&A, have enhanced production capabilities and are expected to contribute to future growth in revenue.
  
• The company’s ability to leverage new technologies and drilling efficiencies in the Delaware Basin positions it for long-term inventory replacement, positively impacting earnings and revenue.
  
• Expected improvement in investment-grade status and strong balance sheet management could reduce leverage over time, thereby supporting earnings and providing flexibility for future growth initiatives.

Permian Resources Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Permian Resources's revenue will grow by 3.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 19.7% today to 23.7% in 3 years time.
• Analysts expect earnings to reach $1.3 billion (and earnings per share of $1.83) by about March 2028, up from $984.7 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $1.6 billion in earnings, and the most bearish expecting $956 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.2x on those 2028 earnings, up from 10.1x today. This future PE is greater than the current PE for the US Oil and Gas industry at 13.1x.
• 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 8.04%, as per the Simply Wall St company report.

Permian Resources Future Earnings Per Share Growth

Risks

• The reliance on consistent M&A for inventory replacement presents integration and financial risks, which could affect net margins and long-term returns.
  
• Potential volatility in oil and gas prices, especially with realized prices and hedging strategies not fully mitigating risks, could impact revenue and free cash flow.
  
• Dependency on efficiency improvements and cost reductions without factoring in potential inflationary pressures or supply chain disruptions could impact earnings and margins.
  
• The focus on Delaware Basin exposes the company to regional risks or regulatory changes that could increase costs or reduce production, affecting revenue and net income.
  
• The company's growth plans do not emphasize significant dividend increases, which might affect shareholder returns and stock price valuation in a competitive dividend-focused market.

Valuation

• The analysts have a consensus price target of $19.4 for Permian 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 $23.0, and the most bearish reporting a price target of just $14.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $5.6 billion, earnings will come to $1.3 billion, and it would be trading on a PE ratio of 18.2x, assuming you use a discount rate of 8.0%.
• Given the current share price of $14.25, the analyst price target of $19.4 is 26.5% 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.