Accelerating Decarbonization Will Erode Gas Infrastructure Fundamentals

Key Takeaways

• Ongoing electrification and stricter EU decarbonization policies threaten Enagás' core gas business and undermine long-term asset utilization and returns.
  
• Rising capital requirements, uncertain regulatory frameworks, and sluggish hydrogen market development increase risks of reduced dividends and potential asset write-downs.
  
• Strategic investment in hydrogen infrastructure, regulatory support, and operational efficiency are positioning Enagás for resilient profits and diversified, long-term revenue growth in energy transition.

Catalysts

Engages in the transmission, storage, and regasification of natural gas.

• Despite management's optimism about green hydrogen, the fundamental shift towards electrification in heating and transport throughout Europe threatens to structurally erode Enagás' addressable market for gas infrastructure over the next decade, posing significant revenue headwinds as volumes stagnate or decline.
  
• The accelerating rollout of renewables and tightening EU decarbonization targets, including a required 90% reduction in greenhouse gas emissions by 2040, will further undermine medium and long-term demand for both natural gas and transitional hydrogen, jeopardizing asset utilization and ultimately compressing EBITDA and asset returns.
  
• Regulatory uncertainty is increasing, with the latest CNMC draft proposing a tariff remuneration slightly below Enagás' minimum assumed rates, raising the risk of lower regulated returns from 2027 onward. This would directly reduce net margins and challenge sustainability of the projected dividend, especially if future frameworks are less favorable than management's baseline.
  
• Enagás faces a heavy investment burden, with an estimated net spend of €3.1 billion on hydrogen infrastructure by 2030, just as legacy gas assets age and require increasing maintenance and replacement capital. Higher CapEx obligations, combined with stagnant or declining regulated earnings, threaten free cash flow and could force a cut in dividend payouts or increased leverage.
  
• Even as new green gas and hydrogen projects are announced, the lack of binding offtake agreements, the slow maturation of the hydrogen market, and the risk of project delays or regulatory holdups may lead to overcapacity or stranded assets. This would drive efficiency losses, write-downs, and recurring disappointments in consolidated earnings far beyond management's current forecasts.

Enagás Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Enagás compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Enagás's revenue will decrease by 77.9% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 2418.0% today to 16.8% in 3 years time.
• The bearish analysts expect earnings to reach €32.6 million (and earnings per share of €nan) by about July 2028, down from €433.6 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 118.5x on those 2028 earnings, up from 0.0x today. This future PE is greater than the current PE for the GB Gas Utilities industry at 13.8x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.29%, as per the Simply Wall St company report.

Enagás Future Earnings Per Share Growth

Risks

• The acceleration of the energy transition across Europe, combined with large-scale policy support for green hydrogen and decarbonization, is positioning Enagás as a central facilitator in providing infrastructure for renewables and flexible backup, which could drive sustained revenue growth as network assets remain highly utilized in both traditional and green gas roles.
  
• Significant and growing investments at the EU and national Spanish levels-including multibillion-euro public funding and grants for hydrogen infrastructure-reinforce the company's strategic projects such as the Spanish Hydrogen Backbone and the H2med corridor, potentially enhancing future earnings and asset value as these programs are rolled out.
  
• Enagás is benefitting from a favorable and increasingly supportive regulatory landscape, with the CNMC and the European Commission recognizing the vital role of gas and hydrogen infrastructure in energy security and transition, pointing toward stable and potentially rising regulated returns which would underpin consistent cash flows and net margins.
  
• Strong operational efficiency and careful balance sheet management, as evidenced by the company's control of operating expenses, improved debt ratios, and stable or improving credit ratings, are likely to support resilient net profits and maintain or enhance the ability to sustain Enagás' targeted €1 per share dividend beyond 2026.
  
• The increasing demand for LNG and pipeline flexibility, along with early-mover advantages and technical leadership in hydrogen and renewable gases, means that Enagás is well-placed to capitalize on long-term industry trends; this could result in diversified and growing income streams from both regulated and unregulated sources, and improved consolidated earnings over the next decade.

Valuation

• The assumed bearish price target for Enagás is €12.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Enagás's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €18.75, and the most bearish reporting a price target of just €12.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €193.9 million, earnings will come to €32.6 million, and it would be trading on a PE ratio of 118.5x, assuming you use a discount rate of 7.3%.
  
• Given the current share price of €13.27, the bearish analyst price target of €12.0 is 10.6% lower.
  
• 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.