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Yahoo
4 hours ago
- Yahoo
The Shale Macro and Evolving Production Dynamics
The upstream shale oil and gas sector has been written off by investors thanks to a 30% decline in oil prices since the first of the year. From near $80 in mid-January, tariff-led demand fears have overcome supply fears, and the price of WTI-the benchmark crude for most U.S. companies, to the upper $ 50s. Even a rebound into the low $60s has not yet assuaged these concerns, leaving them worried about their ability to generate cash for debt service and shareholder returns. That's the fear. What is the reality? We now have a full quarter in the bank for these companies at subdued oil prices, and the message is becoming pretty clear. The upstream sector, while somewhat constrained in capital expenditure allocation—many companies are slowing their growth plans —is doing fine and generating more than adequate free cash to cover operational expenses, debt, and shareholder returns. This means there is an opportunity for investors to make long-term bets in these companies at fire-sale prices. The MacroMicro chart shown below supports this notion. Multiple compression has reduced the Energy sector's S&P weighting from approximately 13% in 2011 to just 3% today. We think the current all-time high reached in April of 13,400 mm BOPD suggests this shrinkage in weighting is not reflective of the true value these companies bring to our economy. That being the case, we will present a snapshot of the Q-1 metrics of some of our favorite shale drillers for investment at present levels. The shale macro We are about 15 years into a complete upheaval in global oil production dynamics, as noted in the EIA graphic below. You can see that, commencing in 2012, the upward slope that had begun in 2008 with early fracking operations took a sharp increase that didn't abate until the latter part of 2023, at around 13,000 mm BOPD. Initially driven by a rapid increase in the rig count, oil shocks in 2014 and then in 2020, led to drillers' re-evaluation of the wisdom of growth at any cost. The COVID-induced oil crash of 2020 led to a profound shift in how managers in these companies were compensated. Incentives that had previously rewarded double-digit annual growth in production and attainment of ESG goals were shifted to value creation for shareholders. Now, after learning to drill longer laterals, increase the number of frac stages, pump higher sand concentrations, and use artificial intelligence to improve efficiency, the industry has been able to produce more and more oil and gas with fewer rigs and frac spreads. Since 2022, the numbers of each have declined by about 30-35% respectively. Some of this reduction is also due to the recent M&A cycle, which has reduced the E&P count in an effort to consolidate premium drilling locations in shale plays. Money not spent on services to grow production is money that goes directly to the driller's bottom line and enables them to run profitable businesses at lower oil and gas prices. In short, U.S. shale operators have wrought a miracle, having survived two extinction-level events in the last decade, the oil crashes of 2014 and 2020. What hasn't changed is the dour view of the investing community toward the E&P sector. We believe that will change soon on its own as investors seek capital returns. If we were to see an increase in oil prices, a trickle would become a torrent, leading to higher EV/EBITDA multiples. I promised you a couple of examples of undervalued companies, so let's have a look. Companies performing at a high level APA Corp, (NYSE:APA) a Permian-focused driller with international operations in Egypt, and Suriname. After a 1-year stock price implosion from $32 to $14 at its low, APA Corp trades at an EV/EBITDA valuation of 2.19X. This is about an 80% reduction from its three-year average of 3.9X. APA nearly balanced production of 166 mm BOE with reserves additions of 162 mm BOE in 2024. With 2P reserves of 969 mm bbls APA holds the equivalent of 2.6 BOE per diluted share. This doesn't include any contributions from their JV with Total Energies, (NYSE:TTE) from the GranMorgu project, offshore Suriname and due to begin producing 220K BOEPD in 2028. APA has a strong balance sheet with no significant maturities before 2035. APA generated EBITDAX of $1.5 bn, $1.1 bn in operating cash flow in Q-1, which covered capex of $790 mm, dividend of $92 mm and share buybacks of $98 mm. APA is cutting capex in the Permian by $150 mm in 2025, but expects to maintain output through frac cycle time improvements. At current prices, APA's dividend yield is 5.4%, and a free cash yield of 21%. Let's look at Chord Energy, (NYSE:CHRD) now. Chord is the biggest shale driller in the Bakken. Q-1, revenues of $1,103 mm were sequentially lower than Q-4, 2024, but well above revenues from Q-1, 2024. Operating cash flow of $656.9MM was up from $566 mm in Q-4, and substantially higher than Q-1, 2024 at $404 mm. Adjusted EBITDA of $695.5MM followed a similar trajectory, exceeding Q-4's $640.1 mm, and Q-1, 2024 at $464.8 mm, Adjusted Free Cash Flow was $290.5MM and Adjusted Net Income was $240.9MM ($4.04/diluted share). After a 55% decline in its share price this year, Chord trades at a very modest 2.6X EV/EBITDA, and $38K per flowing barrel. With 882 mm BOE of proved reserves, CHRD trades at ~15 BO per share. Chord added 63 mm BOE organically and 313 mm BOE as a result of its merger with Enerplus Corporation in 2024. Chord is focused on cost reduction through the implementation of 4-mile laterals and increased shareholder returns. Chord's base dividend is a relatively eye-watering $6.66 with a yield of 7.40%, and has repurchased 2 mm shares during the quarter. This is funded by free cash generation that amounts to a veritable rainstorm offering a free cash yield of 26% on a NTM basis. Your takeaway As we have discussed, multiple compressions have created the impression in investors that upstream E&P companies are marginal businesses with balance sheet problems. Our research suggests that this is far from true, and investors seeking capital appreciation and substantial shareholder returns might carefully consider whether investing in this sector aligns with their portfolio objectives. It is difficult to say when the fundamentals for oil will improve. The key takeaway is that many companies operating in this sector are well-managed and have a focus on enhancing value creation for their shareholders. I began this piece by highlighting the compression in the weighting of the energy sector within the S&P Index. If it were to return to just the 4-5% weighting of the late 2010s, it would mean a substantial uplift for these equities. Until then, investors will have to be satisfied with above-average dividends and shareholder returns. By David Messler for More Top Reads From this article on
Epoch Times
10 hours ago
- Epoch Times
How Major US Stock Indexes Fared June 9
U.S. stocks drifted closer to their record as the world's two largest economies begin talks on trade that could help avoid a recession. The S&P 500 rose 0.1 percent Monday and is 2.3 percent below the record it reached in February. The Dow Jones Industrial Average was flat, and the Nasdaq composite rose 0.3 percent. Markets are waiting to hear what comes of trade talks between the United States and China taking place in London. Treasury yields slipped after a survey suggested consumers' expectations for coming inflation eased. Chinese stocks rose, while indexes were mixed across the rest of Asia and Europe. On Monday: The S&P 500 rose 5.52 points, or 0.1 percent, to 6,005.88. The Dow Jones Industrial Average fell 1.11 points, or less than 0.1 percent, to 42,761.76. The Nasdaq composite rose 61.28 points, or 0.3 percent, to 19,591.24. The Russell 2000 index of smaller companies rose 12.20 points, or 0.6 percent, to 2,144.45. For the year: The S&P 500 is up 124.25 points, or 2.1 percent. The Dow is up 217.54 points, or 0.5 percent. The Nasdaq is up 280.44 points, or 1.5 percent. The Russell 2000 is down 85.71 points, or 3.8 percent. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.
CNBC
15 hours ago
- CNBC
OpenAI hits $10 billion in annual recurring revenue fueled by ChatGPT growth
OpenAI has hit $10 billion in annual recurring revenue less than three years after launching its popular ChatGPT chatbot. The figure includes sales from the company's consumer products, ChatGPT business products and its application programming interface, or API. It excludes licensing revenue from Microsoft and large one-time deals, according to an OpenAI spokesperson. For all of last year, OpenAI was around $5.5 billion in ARR. Reaching its meteoric growth rates requires a substantial amount of cash. The San Francisco-based startup lost about $5 billion last year. OpenAI is also targeting $125 billion in revenue by 2029, according to a person familiar with the matter who asked not to be named because the details are confidential. The Information first reported on OpenAI's revenue ambitions. The new revenue metrics gives some context to OpenAI's monster valuation. OpenAI closed a $40 billion funding round in March, marking the largest private tech deal on record. At today's metrics, OpenAI is valued at about 30 times revenue, which highlights the hyper growth expectations by some of its largest investors. OpenAI is backed by Japan's SoftBank, Microsoft, Coatue, Altimeter, Thrive and others. OpenAI burst onto the scene with the release of the consumer version of ChatGPT in late 2022, and began launching business products the following year. As of late March, OpenAI said it supports 500 million weekly active users. The company announced earlier this month that it has 3 million paying business users, up from the 2 million it reported in February.
