By Jacob Sonenshine
Oil prices might not rally from here, but Chord Energy certainly can -- despite what the commodity does.
Recommending an oil play isn't easy right now. Oil has gained 0.5% this week through Wednesday's close, but that says little about how volatile it has been this year. WTI Crude, the U.S. benchmark, is down 16% from its 2025 high of $80.04 hit in January, but up 18% from its low of $57.13 in May.
Where it goes next is unclear. The good news is that oil prices have held up even after OPEC announced a larger-than-expected supply boost on July 5. That resilience suggests that concerns about oversupply are already reflected in the price, though a shift in the economic or political winds could always cause the volatility to resume.
In such an uncertain environment, investors should look for oil companies that are relying on more than higher prices to boost profits. Chord Energy fits the bill. For starters, the $6.2 billion company has implemented efficiency measures that can boost its free-cash-flow margins.
Its key initiative is installing a "four-mile lateral" -- oil industry lingo for drilling four miles horizontally rather than the more common three miles. The technique allows a single well to cover more area and for more oil to be extracted with less investment. Chord began the project in February, and the market is looking for management's update on its effectiveness when it reports second-quarter results in early August.
As more production comes from these more efficient drilling capabilities, Chord's free-cash-flow margin could reach 24% by 2029, up from 18% today, which would allow it to produce just over $1 billion of free cash, up from $789 million. That margin would be higher than similar-size companies, including Civitas Resources, California Resources, and SM Energy, which currently have margins below 20%.
"[The] greater [cash flow] upside is on 2026-plus," says Gabriele Sorbara, a Siebert Williams Shank analyst, who rates the stock a Buy with a $121 price target, up 13% from a recent $107.
Chord is also looking to selling part of Canadian oil and gas producer Enerplus, which it bought early last year for $11 billion. Selling Enerplus' gas business would allow Chord to focus on its expertise in the Northwest's Williston Basin and could bring in close to $500 million, according to Mizuho Securities analyst William Janela. That would bring Chord's net debt, currently $763 million, below $300 million, leaving more free cash for dividends and buybacks -- and making the stock look even more attractive.
Chord has a free-cash-flow yield of 11.6% based on estimates for the next 12 months, better than the 9% average for the other small oil companies Janela covers. "CHRD's relative valuation underappreciates recent execution, below-average financial leverage, and above-average cash returns," he writes.
No matter what oil prices do.
Write to Jacob Sonenshine at jacob.sonenshine@barrons.com
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July 10, 2025 09:25 ET (13:25 GMT)
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