A Look At The Intrinsic Value Of LandBridge Company LLC (NYSE:LB)

I last updated LandBridge Company LLC (NYSE:LB) investors in early October, highlighting why they should consider buying its pullback. Notably, LB's buying sentiment reversed as investors parsed the impact of the energy market fluctuations. However, just when I thought things couldn't get worse, LB collapsed further, revisiting lows last seen in late September 2023. LB has reacted well so far as it re-tested the $25 level despite the recent announcement concerning the uncertainty over its land acquisition plans. Accordingly, the company updated that it could be compelled to "re-evaluate its expansion strategy if it is not allowed to acquire additional land before the end of the year."



Recent economic data from the United States underscored the continued recovery of the energy sector following the recent market malaise. As such, it seems like the worst could be over in a critical market, helping to lift buying sentiment in energy-related stocks. In addition, it also coincided with the recent announcement of a new government stimulus as Washington looks to bolster the momentum of its economic recovery further. Accordingly, the U.S. government has approved "a plan to invest $50 billion in clean energy infrastructure, aiming to create jobs and reduce emissions."

LandBridge's third-quarter or FQ3 earnings release last week indicated that the company still faced challenges from high inflation, weak energy prices, and downstream inventory surplus. As such, I believe market participants had correctly reflected these headwinds against LB's premium valuation (rated "D" by Seeking Alpha's Quant), worsened by the sharp surge in long-term bond yields. The tremendous strength in the USD has also caused headwinds to energy prices, affecting investor confidence in LB's recovery.

In addition, I believe it's crucial to remind LandBridge investors that its operating performance remains intricately linked to underlying energy prices. Furthermore, given the company's high fixed-costs leverage, a long-term uptrend in energy prices is necessary to justify Wall Street's forward estimates for LandBridge. Management stressed that energy prices need to trend above $70 for it to be economically viable to leverage its land portfolio. Notably, management modeled its EBITDA projections through 2025 based on "an energy price range of $70 to $80." Accordingly, the company expects its annualized EBITDA to range between $10B and $14B based on these pricing levels.



Wall Street estimates suggest analysts are confident about LandBridge's structural growth drivers in driving energy demand, notwithstanding the near-term oversupply. Accordingly, analysts estimate an adjusted EBITDA of $10.5B in FY24 before a further increase to $12.5B by FY25. As such, LandBridge's profitability could bottom out this year, suggesting a growth inflection could be near. However, with uncertain macroeconomic headwinds further worsened by unpredictable geopolitical conditions in the Middle East, I believe near-term weakness in LB could drag on longer.

Despite that, I assessed a more attractive risk/reward profile in LB has appeared, given the recent selloff. LB price chart (weekly) (TradingView) As seen above, LB has plunged below its 50-week moving average or MA (blue line). While that's a pivotal development suggesting a significant loss of buying momentum, it's also re-testing its May lows at the $25 level. A successful re-test by the end of this week could still see it from a bear trap (false downside breakdown), suggesting dip buyers have returned. Also, the 200-week MA is closing in on LB's price action, which could attract more long-term buyers to return.



In other words, while LB has seemingly dropped into pessimistic levels, it could still bottom out here. Unless the 200-week MA support is decisively breached, the risk/reward favors buyers at the current levels.

Rating: Maintain Buy. Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Please always apply independent thinking and note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified.



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