Infrastructure Investments Will Improve Future Efficiency And Production In West Texas And New Mexico

Key Takeaways

• Strategic investments in infrastructure and CO2 methods position Riley Exploration for operational efficiencies and potentially higher future production and revenue.
  
• Focus on cost reduction, free cash flow, and reliable power strengthens financials, supporting debt reduction and potential shareholder returns growth.
  
• Dependence on volatile oil and power markets, alongside significant capital expenditures, poses risks to revenue, earnings, and capital efficiency.

Catalysts

An independent oil and natural gas company, engages in the acquisition, exploration, development, and production of oil, natural gas, and natural gas liquids in Texas and New Mexico.

• Riley Exploration is positioning for future growth by investing in infrastructure that will enhance transportation and processing in West Texas and New Mexico, leading to improved efficiencies and potentially higher future production and revenue.
  
• The company's ongoing drilling and completion campaign is effectively reducing costs and increasing production, which can improve earnings through better operational leverage.
  
• Riley's CO2 pilot in EOR applications has provided insights that could lead to enhanced oil recovery in the future, potentially increasing future production and revenue without additional new drilling.
  
• The RPC Power joint venture is set to provide more reliable power for operations, reducing downtime and potentially lowering operational costs, thereby strengthening net margins.
  
• With lower reinvestment needs and a strong focus on generating free cash flow, Riley's financial strategy positions it well for continued debt reduction and dividend growth, which can enhance shareholder returns and earnings per share.

Riley Exploration Permian Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Riley Exploration Permian's revenue will grow by 4.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 28.5% today to 39.2% in 3 years time.
• Analysts expect earnings to reach $184.1 million (and earnings per share of $8.25) by about February 2028, up from $116.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.9x on those 2028 earnings, up from 5.9x today. This future PE is lower than the current PE for the US Oil and Gas industry at 11.5x.
• Analysts expect the number of shares outstanding to grow by 5.31% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.8%, as per the Simply Wall St company report.

Riley Exploration Permian Future Earnings Per Share Growth

Risks

• Market reliance on oil prices presents a risk as a significant decrease could negatively impact revenue and earnings, given the partial hedge on oil production and potentially reduced growth momentum.
  
• Despite being successful in operational strategies and cost reduction, the discontinuation of the CO2 project and the impairment charges could reflect uncertainties in ongoing project efficacy, affecting net margins.
  
• The success of the Power JV depends heavily on power price trends and availability of low-cost natural gas; volatility in these markets could impact revenue.
  
• Planned infrastructure investments, while beneficial long-term, require significant capital expenditure ($12 million for the New Mexico asset), which could have short-term impacts on free cash flow and capital allocation.
  
• Operational enhancements indicate higher initial capital commitments with delayed returns, presenting capital efficiency risks impacting future earnings if expected returns are not met or if market conditions turn unfavorably.

Valuation

• The analysts have a consensus price target of $52.167 for Riley Exploration Permian 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 $60.0, and the most bearish reporting a price target of just $47.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $470.1 million, earnings will come to $184.1 million, and it would be trading on a PE ratio of 8.9x, assuming you use a discount rate of 7.8%.
  
• Given the current share price of $32.04, the analyst price target of $52.17 is 38.6% 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.