2023-04-16 10:50:08 ET
Summary
- Chord Energy's bankruptcies have given it a lower valuation in our view, while giving the company a net-cash position.
- The company has years of low-cost inventory, enabling strong profits, although we're concerned about the company letting its hedges expire.
- The company expects to generate double-digit shareholder returns at $75 / barrel, with continued investment, enabling even stronger returns.
Chord Energy ( CHRD ) is a hydrocarbon exploration company, with a $6 billion market cap. The company is part of Oasis Petroleum, after it emerged from bankruptcy, which then merged with Whiting Petroleum. Since then, the company has always traded at a discount in our view, a reflection of its past, but as we'll see throughout this article, it has the ability to provide substantial shareholder returns.
Chord Energy Overview
Chord Energy has an impressive portfolio of assets that it primarily operates.
Chord Energy Overview - Chord Energy Investor Presentation
Chord Energy has almost 1 million acres with 94% operated and 73% working interest. The assets are primarily in North Dakota, with some carrying over to Montana. The company has 171 thousand barrels / day of production with a strong 10-years of 2023 production. The company is targeting strong FCF ($825 / 13% million in 2023) along with continued investment.
The company's bankruptcy and reorganization mean it is one of the few companies in the industry with a net cash position. That'll enable increased shareholder returns in a variety of price environments.
Chord Energy Shareholder Returns
The company is focused on generating strong shareholder returns.
Herein lies one of our qualms with the company. The company has taken losses on hedges as prices have remained high. Those losses are okay. The company has significant risk in our view, should prices drop further, without these hedges to protect its pricing environment. Of course, this strategy pans out if prices remain higher, but often it doesn't work like that.
The company returned $1.2 billion in 2022 FCF out of $1.3 billion in adjusted FCF earned for the year. That annualized to a more than 30% shareholder yield for investors. The company's base dividend is almost 4% and it's continued to drive substantial returns on top of that. The company's lack of debt enables virtually all FCF to be returned.
Chord Energy 2023 Development Plan
The company's 2023 development plan should enable both growth and continued returns.
The company's $825 million in FCF guidance is at $75 WTI, almost 10% below current prices which have been supported by OPEC+'s recent production cut. The company expects to invest a massive $850 million in the business focused on at least maintaining its size. We'd like to see evidence that that $850 million is not purely maintenance capital for the company.
The company expects to return 75% of its FCF to shareholders which would indicate a yield of roughly 10.5%. That's an incredibly strong yield that still leaves the company with extra cash.
Our View
Chord Energy has an impressive portfolio of assets. The company has a 10-year reserve life based on 2023 production and is continuing to invest heavily in the future of its business. Its bankruptcy has helped its balance sheet considerably, and as a result, the company can substantially expand its ability to drive shareholder returns.
We expect the company to continue driving double-digit shareholder returns, making it a valuable investment.
Thesis Risk
The largest risk to our thesis is crude oil prices. At $75 / barrel, the company is quite profitable, helped by a reliable financial position. At prices more than that, especially as the company decreases hedges, it's more profitable. Below that, however, the company's profits drop rapidly making it a worse investment. Given volatility in commodity prices, that's worth paying close attention to.
Conclusion
Chord Energy is a valuable investment. The company has emerged stronger from its COVID-19 induced bankruptcy, and built up an impressive portfolio of assets. It has a decade long reserve life at its current production levels, and it's continuing to invest heavily in its business. We expect those investments to continue.
Going forward, we expect the company to continue driving double-digit shareholder returns. It can handle another downturn due to its lack of debt, although we are concerned about its reduced hedging program. Let us know your thoughts in the comments below.
For further details see:
Chord Energy Has Hedging Risk But Strong Growth Potential