Projects Like REEF And Pipestone II Will Expand Capacities And Support Future Operations

Key Takeaways

• New midstream projects and strategic agreements enhance AltaGas' capacity, driving revenue through increased export volumes and optimized logistics.
  
• Strong financial performance and customer growth, alongside infrastructure investments and focus on deleveraging, bolster future growth and earnings.
  
• U.S. tariff uncertainties, regulatory challenges, and project risks threaten AltaGas's margins, earnings stability, and capacity for future investments.

Catalysts

Operates as an energy infrastructure company in North America.

• The development and on-schedule progress of major midstream growth projects such as REEF and Pipestone II are expected to increase AltaGas' capacity for gas processing and liquid handling, driving future revenue growth through higher export volumes and enhanced processing capabilities.
  
• The company's utilities business is experiencing strong customer growth and has significant long-term infrastructure modernization plans, which should lead to increased revenue from a growing rate base and improved system reliability.
  
• Recent commercial successes, including long-term gas processing and liquids handling contracts and increased tolling volumes, provide stable and predictable cash flows, contributing positively to future earnings.
  
• Strategic agreements, like the one with Keyera, leverage AltaGas' infrastructure to secure stable export volumes and access to extensive rail and logistics networks, potentially enhancing net margins by optimizing logistics and operations.
  
• AltaGas' focus on deleveraging and cost management, alongside strong financial performance and continued infrastructure investments, is likely to result in improved earnings and financial flexibility, supporting future growth initiatives.

AltaGas Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming AltaGas's revenue will grow by 9.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.6% today to 4.9% in 3 years time.
• Analysts expect earnings to reach CA$812.7 million (and earnings per share of CA$2.69) by about April 2028, up from CA$578.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.6x on those 2028 earnings, down from 20.7x today. This future PE is lower than the current PE for the CA Gas Utilities industry at 20.5x.
• Analysts expect the number of shares outstanding to grow by 0.7% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.99%, as per the Simply Wall St company report.

AltaGas Future Earnings Per Share Growth

Risks

• The uncertainty surrounding U.S. tariffs on Canadian energy introduces risks that could negatively impact the cash flows of AltaGas's upstream customers and might necessitate price adjustments, potentially affecting AltaGas's merchant export margins and net earnings.
  
• The company is focused on various growth projects with significant capital requirements, such as the REEF and Pipestone II facilities. Any delays or budget overruns related to these projects could strain AltaGas's capital resources and negatively impact future earnings and cash flows.
  
• AltaGas is reliant on stable regulatory environments for its utilities business growth prospects, especially regarding its rate case filings and modernization programs. Regulatory setbacks or unfavorable rulings could impact revenue streams and margin sustainability.
  
• Environmental and weather-related circumstances present uncertainties, particularly in regions like D.C. and Michigan where weather normalization is not present. Warm weather conditions, which have previously affected revenue consistency, remain a risk to forecasted income stability.
  
• The company is pursuing a balance between paying down debt and investing in capital projects. Failure to achieve financial targets or higher-than-expected leverage could constrain future investment capacity and potentially impact AltaGas's ability to achieve desired earnings growth.

Valuation

• The analysts have a consensus price target of CA$39.4 for AltaGas based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$42.0, and the most bearish reporting a price target of just CA$35.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$16.5 billion, earnings will come to CA$812.7 million, and it would be trading on a PE ratio of 17.6x, assuming you use a discount rate of 6.0%.
• Given the current share price of CA$40.04, the analyst price target of CA$39.4 is 1.6% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.