MNR - Mach Natural Resources: Industry Demand Can Drive Growth

2023-12-28 14:06:39 ET

Summary

• Mach Natural Resources reported quarterly results impacted by macroeconomic pressures, but is expected to boost profitability through acquisitions and demand in the market.
• The company's recent acquisition of interests in oil and gas properties in Oklahoma are expected to accelerate growth and capture market demand.
• The company can grow in the future as the demand dynamics are positive in the industry and the company has expanded its production capabilities by acquiring additional interest in Anadarko.
• After comparing the forward P/E ratio of 4.04x with the sector median of 10.13x, we can conclude that the company is undervalued.
• The stock is currently undervalued, and we can expect healthy growth of 28%-34% due to its expansion activities.

Investment Thesis

Mach Natural Resources (MNR) is an oil and natural gas firm that develops, acquires, and produces oil, NGL reserves, and natural gas. It has recently reported its quarterly results and experienced resistance in its growth, mainly due to macroeconomic pressures. However, I believe the company can boost its profitability in the future as it has acquired additional interests in oil and gas properties which can increase its production and make it strongly positioned to capture the market demand.

About MNR

MNR is an upstream oil & gas firm that mainly engages in developing, acquiring, and producing natural gas, NGL reserves, and oil in the Anadarko Basin region of Western Oklahoma, Southern Kansas, and the panhandle of Texas. In October 2023, the company announced the launch of its IPO of 10 million common units, representing 10.5% limited partner interest. As per its partnership, the firm has to distribute all the cash on hand at the end of each quarter. It will announce dividends in mid-February of 2024. On June 30, 2023, Its average net daily production was approximately 65 Mboe/d, for twelve months. It included around 4500 gross operated wells and an average working interest of approximately 75%. The company owns comprehensive acreage in the Anadarko Basin, comprising about 936,000 net acres, of which 99% is held for production. It has a drilling inventory of more than 2000 which facilitates sustainable production. The company's portfolio also includes certain midstream assets located in strategic locations. It also has a strong history of opportunistic acquisitions. The firm's next twelve-month revenue mix estimates include 62% oil, 15% NGLs, and 23% Gas.

Financials

The energy industry experienced various disruptions, including elevated interest rates, geopolitical conflict, and rising material costs. However, the scenarios are contrasting and display a positive picture. The global demand has increased by 2.3 mbpd in 2023 and has also surpassed the 100 mbpd point for the first time in history. This growth is mainly observed due to continuous efforts to reduce carbon emissions. As oil and natural gas are important elements in reducing carbon footprints, companies worldwide are investing heavily in this segment. In addition, the U.S. is one of the leading exporters and exports quantities close to the total production of Russia or Saudi Arabia. All these trends can grow further and we can expect a solid start in the next year which might be mainly fueled by an improving macroeconomic environment, and high oil prices. The global upstream industry is expected to generate more than $800 billion in free cash flows in the upcoming year. This presents huge opportunities for the companies operating in this sector. Identifying these scenarios, the company has recently agreed with Paloma to acquire interests in oil and gas properties in Oklahoma. It also includes rights and some related assets located in certain counties of this region. This transaction was finalized for a cash consideration of $815 million and is expected to close on 29th December. This asset has a recent production of about 32000 Boepd (57% liquids, 23% oil). It also has PDP reserves of around 75 million barrels of oil equivalent. It comprises 1 rig and 6 additional wells expected to be completed before the closing date. This property comes with high-return drilling locations. It includes 62,000 net acres in the Anadarko Basin, of which 76% is located in the core development area which can further help the company to increase its operational footprint. I believe this acquisition can act as a catalyst to accelerate the company's growth as it can boost its production levels significantly and make it strongly positioned to address the growing demand in the market and capture an additional market share by expanding its profit margins. In addition, the widening of the company's operations with more interest in the Anadarko basin can also strengthen its presence and increase its competitiveness.

The company has reported its quarterly results. It reported a revenue of $216.76 million, down 42.37% compared to $376.17 million in Q322. This growth was mainly resisted due to a decrease in the average selling price of oil. The midstream earnings also reduced. Net income declined by 56.03% YoY from $213.64 million to $93.92 million. The average daily total volume (Mboe/d) was 66.28. The MNR reported $70.21 million in liquidity and adjusted EBITDA stood at $139.70 million.

The drop in the selling price restricted the revenue growth. However, it has managed to keep healthy levels of production. I believe the company can grow in the future as the demand dynamics are positive in the industry and the firm has expanded its production capabilities by acquiring additional interest in the Anadarko Basin which can help it cater to the growing demand and capitalize on market opportunities.

What is the Main Risk Faced by MNR?

The company highly depends on significant purchasers to sell its natural gas, oil, and NGL production. The company's portfolio included two firms that contributed more than ten percent to its total revenues. In addition, it does not have long-term contracts with its clients. It deals with organizations such as Phillips 66 (PSX) which represented approximately 52% of the total revenues. If the company loses any of the purchasers, it can negatively impact its profit margins.

Valuation

The energy industry is booming rapidly even as the world is moving towards net-zero carbon emissions. I think the firm is positioned well to cater to the growing demand as it has recently planned to expand its production capabilities by acquiring additional interests in the Anadarko Basin, which can help it to increase its market share and profitability by selling additional volumes from its elevated production levels. After considering all these factors, I am estimating an EPS of $3.91 for FY2024, which gives the forward P/E ratio of 4.04x. After comparing the forward P/E ratio of 4.04x with the sector median of 10.13x, we can conclude that the company is undervalued. I think the firm can potentially grow in the next year as a result of positive demand in the industry and its increasing production capabilities, which can help it to trade above its current P/E ratio. I estimate that the company might trade at a P/E ratio of 5.43x in 2024, giving the target price of $21.23, which is a 34.37% upside compared to the current share price of $15.80. Reduced revenue due to the high concentration of revenue sources can affect the financial performance of the company during adverse economic conditions. I think in that case, it can contract profit margins and EPS of MNR.

I believe in a bear case scenario of reduced revenue due to high dependency on limited customers, EPS of FY2024 might be $3.78, and estimate that the company might trade at P/E ratio of 5.36x, which gives target price of $20.26, representing upside of 28.23%.

Conclusion

The company deals in the oil & natural gas business and has reported decent performance despite the macroeconomic pressures. The demand is healthy in the industry and to cater to this demand MNR has recently acquired additional interests in the Anadarko Basin which can help it to increase its production and boost its growth by serving more customers. However, its client base is highly concentrated which can reduce its profitability in case of reduced orders. The stock is currently undervalued, and we can expect healthy growth of 28%-34% due to its expansion activities. After taking into consideration all the above factors, I assign a buy rating to MNR.

For further details see: