Is Chord Energy (CHRD) A Double? Is PV-10 Math Fake?

Maybe and Maybe?

The Williston basin in North Dakota has historically had the ignominy of “not being the Permian basin”. Also, fundamentally, the rock sucks— it’s gassier, has worse margin capture than Permian/gulf coast, and lost the Dakota Access Pipeline, sacrificed to the environmentalist gods. That being said, even crappy rock just got re-valued way higher with respect to the current geopolitical situation.

Enter Chord Energy (CHRD). At $65/bbl, Chord’s reserves/PV-10 suggests something in the neighborhood of ~$9B. Chord’s EV is ~$8.5B- pretty tight to PV10. However, now that the Straits of Hormuz are complicated, the prompt price of Brent and WTI tend to do things that are unpredictable, particularly now in deep backwardation. As a reminder to generalists: the only time you ever see spikes in spot of any commodity is in backwardation— it’s when the market is most complacent.

Importantly, only 20% of CHRD’s oil production is hedged.

Let’s say the quagmire persists and we find ourselves staring at a flat $100/bbl spot price for the foreseeable future. Margin capture is typically asymptotic in these situations. If the price of spot goes up by 50%, your value goes up by 50% * X, where X is some amount of margin that doesn’t pay suppliers, midstream or transportation costs. In the Bakken, the math is delightfully nonlinear. At $65 oil, Chord is making a decent margin. They pay the engineers, they buy the frac sand, they pay the North Dakota taxes, and they have enough left over to buy back some shares and maybe a nice lunch. But their “breakeven” is around $45.

Said another way: at $65 oil, their margin is $20. At $100 oil, margin is $55. The price of oil went up 53%, but the margin went up 175%. This is what we call “unmitigated operating leverage,” and it is why oil stocks are essentially just high-delta call options on human conflict.

Now, if you take Chord’s 917 million barrels and run them through a $100 price deck, the PV-10 gets a little wonky (we talked about this with mining stocks) Suddenly, those Proved Undeveloped (PUD) wells that looked marginal at $60 are now printing money. The tail-end production of an old well that was going to be plugged next year is suddenly worth keeping open for another five. Compound this with the fact that chord is now drilling 4 mile laterals, Chord’s PV-10 jumps from $9B to ~$17B

The bear case for the Williston Basin (the Bakken is a subset of the Williston where CHRD drills) has always been “The Differential.” North Dakota is too far away from everything. When production spikes, the pipelines fill up, and you have to put oil on a train. Putting oil on a train is expensive, dangerous, and makes the effective price of your oil much lower than the WTI headline. But the world has changed. Chord has become a consolidated king of the Bakken after the merger with Whiting. They are drilling 4-mile laterals—which is basically a way of saying they are getting more oil out of the ground using fewer holes. I do love this slide of the investor deck— sort of admitting that they’re doing it as a quasi-mad scientist experiment to shave $2/bbl off their lifting cost:

If the Middle East stays in a quagmire, the marginal barrel of oil isn’t coming from a new offshore platform in Brazil (which takes seven years to build). It’s coming from a PUD well in Mountrail County, North Dakota, that Chord can turn on in a few months. Chord is a bet on geopolitical friction meeting U.S. operational efficiency.

If the quagmire is transitory—a word that has never ended well for anyone in finance—then Chord is a boring, crappy, high cost wildcatter~ish type name. But if the quagmire is the new normal, the $65 price is a relic of a bygone era. Chord’s $17B PV-10 becomes real.