This Merger Has Created a “Holy Grail” Opportunity

Chord Energy Corp. (Nasdaq: CHRD) was born out of a merger between Oasis Petroleum and Whiting Petroleum just last month.

Chord is a shale oil producer fully focused on extracting from the Williston Basin in North Dakota – what investors know as the Bakken Shale oil play.

The history surrounding Chord isn’t great.

Both Oasis and Whiting were forced to declare bankruptcy during the COVID-19-induced oil crash of 2020.

And while COVID-19 pushed the companies over the edge, it was years of reckless spending on chasing growth that put both entities so close to the cliff’s edge in the first place.

However…

Now that Chord has emerged from bankruptcy and the merger, I see something I like here – a huge free cash flow yield!

If you don’t recall, free cash flow is the holy grail for investors.

For the full year of 2022, Chord’s management says that the company will generate $1.35 billion in free cash flow. This excess cash can be used for dividends, share repurchases, balance sheet improvement or investments in growth.

And the $1.35 billion in free cash flow guidance assumes a West Texas Intermediate oil price of $90 per barrel – exactly where we’re at today.

As of writing, the combination of 41.4 million shares outstanding, a $125 share price and $300 million in net debt brings Chord’s current total enterprise value (market cap plus net debt) to $5.475 billion.

That means the company is trading at a free cash flow yield of 25% ($1.35 billion / $5.475 billion).

Put another way, Chord could theoretically pay a 25% dividend to shareholders over the next 12 months if current oil prices hold.

Chord isn’t doing that, but management has pledged that as long as Chord’s debt-to-EBITDA (earnings before interest, taxes, depreciation and amortization) ratio remains below 0.5, the company will return 75% of free cash flow to shareholders.

With $1.35 billion in free cash flow expected over the next 12 months, that would equate to $1 billion returned to investors.

And with current net debt of only $300 million, Chord’s debt-to-EBITDA ratio is only 0.15. So the 75% payout is a lock.

The company’s current dividend is now set at $5 per share, which equates to an annualized yield of 4%.

With 41.4 million shares outstanding, that will consume $207 million in cash.

That means the other $793 million in cash that the company intends to be returned to shareholders would be used to repurchase Chord shares.

At the current share price, that would see Chord’s share count be reduced by 15% in just one year!

That means if oil prices hold, Chord Energy is going to pay shareholders a 4% dividend and reduce its share count by 15%.

That is a big return.

Plus, the other 25% in free cash flow that isn’t being returned can be used to strengthen the balance sheet or do something else productive.

The only real fly in the ointment here is that oil prices need to stay at current levels for that to happen.

Predicting where oil prices will go has historically been extremely difficult, although we did make one great call together here at Wealthy Retirement in November 2020.

If I were currently very bullish on oil, I’d rate shares of Chord as “Extremely Undervalued.”

Today, I’m moderately bullish on oil, so I’m rating Chord Energy Corp. shares as “Slightly Undervalued.”

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Good investing,

Jody