Market Capitalization: $7.5B (pro-forma $11.2B)
Enterprise Value: $7.6B (pro-forma $11.5B)
Price: $180.22 (as of 5/8/24)
What the Company Does
Chord Energy is a leading exploration and production (E&P) oil and gas company with operations located in the Williston Basin. Accounting for the company’s recent acquisition of peer Enerplus, CHRD will become the largest producer in this basin with expected production of nearly 250 thousand barrels of oil equivalent per day (Mboe/d).
Why We Own It
Over the years, CHRD has amassed a concentrated position in the Williston basin, resulting in impressive economies of scale and strong growth prospects through further Mergers & Acquisitions (M&A) consolidation of other operators in the region, as many larger peers remain focused on other basins. Management has thoughtfully ramped up production in recent years by increasingly relying on its most productive wells and the usage of three-mile laterals while drilling wells, which have resulted in a nearly 25% reduction in drill times since the beginning of 2023, greater capital efficiency, and improved unit economics for production. As a result, CHRD now possesses a low-cost inventory position, which should support a decade’s worth of production and remain economic even if oil prices fall to $60/barrel, implying fairly sustainable free cash flow generation regardless of commodity price fluctuations. Management has also highlighted Enerplus’s best-in-class core Williston Basin inventory, which is expected to support ~10 years of development while also generating $150MM/year in synergies.
Based on management’s expectations for oil prices at $79/bbl (barrel) and natural gas prices of $2.50/MMBtu, CHRD expects to deliver superior EBITDA margins relative to its large-cap peers (CTRA, MRO, OVV, PR) in 2024 ($29/boe vs. peer group average of $25/boe) with less leverage (expected year-end net leverage ratio of 0.2x vs. expected year-end peer group average of 0.7x). Despite the company’s relatively attractive outlook, CHRD also offers a compelling valuation, even when accounting for the company’s acquisition of Enerplus, with shares trading at a pro-forma forward (2025 estimates) EV/EBITDA multiple of ~3.8x, a nearly 14% discount to large-cap peers and a 70% discount to the S&P 500.
How Management Allocates Capital
CHRD expects to end 2024 with a pro-forma net leverage ratio of ~0.2x, well below management’s target leverage ratio of <1x in a “normalized price environment,” which enables management to maintain its commitment to returning 75%+ of its free cash flow to shareholders. Management plans to lean on its $5/share annual base dividend supplemented by variable dividends and $653MM (5.8% of pro-forma market cap) of remaining buyback authorization to achieve this target. The company expects to spend roughly 80% of its FY24 capex budget of $925MM on drilling and completing wells. Looking at CHRD’s stand-alone (i.e. no Enerplus) operations, these expectations imply that management expects to reinvest ~50% of its 2024 EBITDA generation into the E&P business, while returning ~$15/share to shareholders (8.3% yield). Lastly, while management’s top priority at the moment is integrating Enerplus with CHRD’s existing operations, CHRD’s pristine balance sheet offers ample financial flexibility to pursue further M&A consolidation of the Williston Basin in the future. Management pointed out that CHRD’s pro-forma production represents only 12-13% of the Bakken shale’s (located in Williston Basin) total production, with other players in other basins consolidating to a much larger extent than where the Bakken is today.