The sanctions on Russian energy exports have accelerated the need for alternatives to fill global supply gaps. While long-term transition risks remain, the current market dynamics are driving a revival of U.S. energy development.

Pioneering shale basins that underwent years of production declines such as the Haynesville are experiencing a rebirth thanks to technological advancements like horizontal drilling and hydraulic fracturing.

As natural gas prices spike worldwide, these mature fields have become economically attractive to re-develop. Major operators are allocating rising capital expenditures towards re-activating dormant shale assets.

Nowhere is this shale renaissance more evident than in the premier oil and gas producing regions of West Texas and Eastern New Mexico, collectively known as the Permian Basin. As the highest volume onshore oil field in America, the Permian remains the primary engine of U.S. energy growth.

Recent investments have unlocked new geological zones using longer laterals and denser fracturing. Production in the Permian is projected to hit historic highs, accounting for nearly half of all U.S. crude supply.

Liberty Energy (LBRT), operating primarily in these large shale basins, is strategically positioned to capitalize on the current market dynamics.

The company specializes in hydraulic fracturing and shale completion services, making it an essential partner for exploration and production (E&P) companies.

These services are critical for getting wells operational and maintaining production levels, which is particularly important given the current global demand for oil and gas.

With high operating leverage Liberty can significantly increase its earnings with a relatively small increase in revenue, which is likely in a high-demand scenario.

Also, Liberty’s robust pricing power allows the company to pass on costs to customers, a vital feature when dealing with fluctuating market conditions.

Additionally, concentrated exposure to U.S. energy, particularly in prolific basins like the Permian and Eagle Ford, positions Liberty to directly benefit from the increased demand for domestic oil and gas production.

We can see these factors already in effect…

The company has managed to increase its profitability in the last year. While it struggled in 2020 and 2021, Uniform ROA recovered fast and reached above 15%.

With the demand for energy coming from the U.S. not slowing down, we can expect the company’s Uniform ROA to reach above 25%, close to all time highs.

However, the market is underestimating the ability of domestic shale production to bridge global supply gaps in the near term.

We can see what the market thinks through our Embedded Expectations Analysis (“EEA”) framework.

The EEA starts by looking at a company’s current stock price. From there, we can calculate what the market expects from the company’s future cash flows. We then compare that with our own cash-flow projections.

In short, it tells us how well a company has to perform in the future to be worth what the market is paying for it today.

At the current stock price, the market expects the company’s ROA to fall from 15% in 2022 to 5%.

The market thinks the surge in the demand for U.S. energy is not sustainable in the long run.

The continued technological gains could unlock even greater shale resources, extending this renaissance for years to come.

As global energy security concerns drive demand for U.S. energy exports, demand for products and services from Liberty will remain high.

SUMMARY and Liberty Energy Inc Tearsheet

As the Uniform Accounting tearsheet for Liberty Energy Inc (LBRT:USA) highlights, the Uniform P/E trades at 8.7x, which is below the global corporate average of 18.4x but above its historical P/E of 3.6x.

Low P/Es require low EPS growth to sustain them. In the case of Liberty Energy, the company has recently shown a 268% shrinkage in Uniform EPS.

Wall Street analysts provide stock and valuation recommendations that in general provide very poor guidance or insight. However, Wall Street analysts’ near-term earnings forecasts tend to have relevant information.

We take Wall Street forecasts for GAAP earnings and convert them to Uniform earnings forecasts. When we do this, Liberty Energy’s Wall Street analyst-driven forecast is a 44% EPS growth in 2023 and a 8% EPS shrinkage in 2024.

Based on the current stock market valuations, we can use earnings growth valuation metrics to back into the required growth rate to justify Liberty Energy’s $18.51 stock price. These are often referred to as market embedded expectations.

The company is currently being valued as if Uniform earnings were to shrink 11% annually over the next three years. What Wall Street analysts expect for Liberty Energy’s earnings growth is above what the current stock market valuation requires through 2024.

Furthermore, the company’s earning power is 3x its long-run corporate average. Moreover, cash flows and cash on hand are 1.2x its total obligations—including debt maturities, capex maintenance, and dividends. Also, the company’s intrinsic credit risk is 170bps above the risk-free rate.

All in all, this signals low dividend risk.

Lastly, Liberty Energy’s Uniform earnings growth is in line with its peer averages but below its average peer valuations.

Best regards,

Joel Litman & Rob Spivey

Chief Investment Strategist &
Director of Research
at Valens Research

The Uniform Accounting insights in today’s issue are the same ones that power some of our best stock picks and macro research, which can be found in our FA Alpha Daily newsletters.