Chord Energy Corporation

Moat: 1/5

Understandability: 3/5

Balance Sheet Health: 4/5

Chord Energy Corporation is an independent exploration and production company focused on oil and natural gas reserves primarily in the Delaware Basin in the Permian Basin and in the Williston Basin in North Dakota.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Chord Energy operates through four main operational areas: the Delaware Basin in New Mexico and West Texas, the Williston Basin in North Dakota and Montana, the DJ Basin in Colorado, and other assets. They are primarily an oil and gas producer with some NGLs. This is a typical business model for the sector. Here’s a detailed analysis of Chord Energy:

Business Overview

  • Revenue Distribution: Chord’s revenues are primarily derived from sales of crude oil, natural gas, and natural gas liquids (NGLs). Their performance, therefore, is highly dependent on commodity prices. They engage in the exploration and production of these resources, generating a significant portion of their revenue from sales to midstream companies and refiners. In addition, they have a small component of revenues coming from gathering and processing expenses that they charge. The company’s revenues fluctuate with both the quantity sold and the prices at which the different commodities are sold.
  • Industry Trends: The oil and gas industry is highly cyclical, characterized by price volatility, intense competition, and evolving technologies. A significant factor is government regulation, particularly with regards to environmental and safety standards. Demand for fossil fuels remains strong, but the industry also faces increasing scrutiny and pressure to transition to cleaner energy sources. Also, there are some geopolitical risks associated with the industry and the regions where the company operates.
  • Margins: Margins in the oil and gas industry are largely dependent on the price at which it can sell its products, and the costs it incurs to acquire those products, including exploration and development costs, and operating costs. Low commodity prices may compress margins, while high commodity prices can expand margins significantly. As such, profitability is highly variable. The company’s margins are also affected by the company’s operational efficiency (how much they produce) and the cost of the necessary infrastructure to get those products to market.
  • Competitive Landscape: The market is characterized by a large number of players, including both big and small independent producers. Given the fungibility of oil and gas, price competition is fierce. Companies compete on a combination of factors including product quality, reliable production, a strategic location, strong finances, and favorable access to pipeline and processing infrastructure.
  • What Makes Chord Different: Chord Energy focuses its activities on core areas where they have a deep expertise, enabling operational efficiency and lower production costs. They also focus on maintaining a strong financial position, which allows them to navigate downturns in commodity prices better than many other players. Furthermore, they are focused on developing a highly efficient and repeatable approach to both well-site development and production, and they invest heavily in technology to enhance performance and reduce costs, which they think will allow them to maintain a competitive advantage even in areas where their production may be higher cost.

Financial Analysis

  • Recent Financial Performance: In their Q1 2024 earnings, the company reported strong production results, beating expectations, with average daily production of 203,000 BOE/d. The company also completed the strategic acquisition of assets, including the consolidation of its Utica assets. However, revenues were impacted by lower commodity prices, falling to $910 million from $1.34B the prior year. Although revenues were down, they also mentioned a “significant reduction in costs and increased production efficiencies.” Net income was also down to $351.4 million from $761.2 million the prior year, and Adjusted EBITDA declined to $544.3 million compared to $988.7 million.
The company increased its share repurchase program, bringing the total authorized to $2.5 billion.

The company’s CEO has stated that the company is on track to meet its multi-year plan despite volatile commodity prices. *   **Profitability:** The company's profitability metrics are highly sensitive to changes in commodity prices. For example, in the first quarter of 2024, the operating margins are a third lower than the prior year, and operating profit is down more than 50%. In times of high oil prices, the company can be immensely profitable, but that success disappears quickly in downturns. ROIC is also highly volatile. *  **Balance Sheet Health:** The latest report shows total assets at $7.6B, and total liabilities (including lease liabilities) at 2.19B. The debt-to-equity ratio comes in at around 0.36 (assuming a market cap equal to current value). Therefore, the company is not overleveraged. Furthermore, it also has a cash balance of $263 million and some available credit capacity ($3.2B in the revolving credit facility). However, the company has engaged in significant share buybacks that utilize excess cash which could reduce capital for operations in the future. Overall, though, the company has good balance sheet strength. *  **Cash Flow:** The company has positive cash flow from operations ($869 million) for this quarter alone. As said before, the company has some significant cash reserves that it could potentially utilize to help weather future downturns. This is offset, however, by the company engaging in significant capital expenditures, both for exploration as well as acquisitions. Additionally, as mentioned in the overview, the company has had some rather significant swings in its operational profitability and free cash flow.  * **Capital Allocation Policy**: The company uses a consistent strategy to enhance shareholder returns, namely focusing on the lowest-cost operational development, maintaining a strong financial position, and returning excess capital to shareholders. With this strategy, they state that they can both develop high-return and efficient assets, as well as allow excess cash to be returned to shareholders.

Moat Assessment: 1 / 5

Based on the analysis, Chord Energy’s moat is limited, and its rating reflects that. The company’s core business is in the extraction and production of oil and natural gas, and therefore is subject to large volatility in prices and intense competition from various sources. Here’s why I give this rating:

  • Low Pricing Power: Oil and natural gas are commodities with no product differentiation; therefore, companies in this space have little pricing power. Price is primarily determined by world supply and demand, over which CHRD has little influence.
  • Intense Competition: Many companies are involved in this space, and competition is fierce. New exploration companies and technology startups are continually trying to reduce costs and find innovative ways to improve output. Existing companies may be easily copied and overtaken by new competitors.
  • Dependence on Capital Intensity: Given the highly capital intensive nature of the business (exploration, drilling, and extraction requires large investments), these are low-barrier-to-entry businesses, because it simply takes massive financial resources and expertise in the business to enter these markets. Although those firms that have an efficient operational set up have an advantage, it can easily be replicated.
  • Dependence on Finite Resources: The source of growth for the company is from finite resources, and the company may find that it cannot extract further resources efficiently. As such, it must be diligent in reinvesting in exploration and development so that it can find more sources of income and profit.

Risks

The competitive moat for Chord, as well as its operational strength is subject to the following risks:

  1. Commodity Price Volatility: Fluctuations in oil and gas prices will heavily affect the company’s financial performance and therefore its share price.
  2. Regulatory Changes: New regulations in environmental and other laws may drive costs higher and reduce the potential profitability of the business.
  3. Global Geopolitical Factors: Events across the world can have an outsized impact on energy prices, as well as the demand of their product.
  4. Technological Advances: If a company is able to make technological breakthroughs that would cut production costs, or enhance returns, that could drive the price lower, as well as steal market share from other companies.
  5. Exploration and Production Risks: There is also exploration risk. For instance, the company might not discover any new, profitable oil and gas wells. In addition, poor management at the sites could lead to a decrease in production and an increase in costs.
  6. Environmental Concerns: Climate change policies may reduce the demand for oil and natural gas, decreasing profits and valuations for the sector as a whole.

Understandability: 3 / 5

The business of extracting oil and gas is relatively straightforward, but a full understanding of financial statements, especially the tax implications and methods of accounting for commodity pricing can be rather complex. While its value drivers are simple to understand, the impact that different external factors can have on this value is not simple at all. I would rate it as a 3.

Balance Sheet Health: 4 / 5

Chord Energy’s balance sheet is generally healthy with manageable debt and a decent cash balance. This helps it weather downturns and gives some flexibility for further investments. Although it has taken on additional debt to finance acquisitions, the leverage ratio is still manageable, and should remain so unless future financial downturns or price changes change the operational viability of the company. I would give it a 4.