Hedging LNG Volumes Will Limit Revenue Growth Amid Price Rebound

Key Takeaways

• Heavy investment in renewables and biomethane may strain capital expenditure and impact net income due to high initial costs and lower short-term returns.
  
• Hedging LNG volumes and operational cost reductions could limit Naturgy's ability to capitalize on market changes, affecting revenue growth and earnings stability.
  
• Strong financial performance and strategic investments in renewables position Naturgy for stable future growth despite challenging energy markets and regulatory environments.

Catalysts

Engages in the supply, liquefaction, regasification, transport, storage, distribution, and sale of natural gas.

• Naturgy plans to focus heavily on renewable energy investments, including increasing the installed capacity of renewables to 9.5 gigawatts by 2027. This could put pressure on capital expenditure and potentially impact future net margins due to the high initial capital outlay.
  
• The company is advancing its biomethane projects and intends to invest €800 million by 2027, despite only expecting a small EBITDA contribution by that year. This could lead to lower returns on investment in the short term, impacting Naturgy's net income during the transition phase.
  
• Naturgy's commitment to hedging its LNG volumes to reduce volatility could limit the company's ability to capitalize on potential future increases in energy prices, potentially impacting revenue growth in a scenario where energy prices rebound.
  
• While Naturgy's focus on operational excellence and customer service is positive, the company's plan to reduce operational costs might lower its capacity to rapidly respond to unforeseen market changes or regulatory shifts, which could affect its overall earnings stability.
  
• The proposed share repurchase program, aimed at improving liquidity and enhancing free float, could temporarily affect cash flow and limit financial flexibility, potentially impacting short-term earnings per share growth if market conditions change.

Naturgy Energy Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Naturgy Energy Group's revenue will decrease by 0.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 10.0% today to 9.4% in 3 years time.
• Analysts expect earnings to reach €1.8 billion (and earnings per share of €1.85) by about May 2028, down from €1.9 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €2.1 billion in earnings, and the most bearish expecting €1.6 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.5x on those 2028 earnings, up from 13.1x today. This future PE is greater than the current PE for the GB Gas Utilities industry at 13.1x.
• 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 7.17%, as per the Simply Wall St company report.

Naturgy Energy Group Future Earnings Per Share Growth

Risks

• Despite a challenging energy market with falling prices, Naturgy reported strong and resilient financial performance for 2024, remaining in line with 2023 record highs. This indicates robust revenue and earnings potential, even in adverse conditions.
  
• The company's strong balance sheet and liquidity position, including a net debt-to-EBITDA ratio of 2.3x and FFO-to-net-debt of around 29%, provides significant financial flexibility, which could support stable earnings in the future.
  
• Naturgy's disciplined capital allocation strategy allowed it to cover its CapEx, dividends, and taxes with cash flow, suggesting strong operational performance and potential future revenue stability through strategic investments, particularly in renewables and networks.
  
• Successful management of regulatory environments and tariff increases, especially in Latin America, provides a potential boost to revenue, as evidenced by EBITDA increases in regions like Argentina and Chile.
  
• Naturgy's commitment to invest heavily in networks, renewables, and biomethane, along with a focus on operational efficiency and emerging technologies like artificial intelligence, presents opportunities for revenue growth and margin improvements as the company adopts energy transitions and improves consumer operations.

Valuation

• The analysts have a consensus price target of €25.196 for Naturgy Energy Group 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 €30.0, and the most bearish reporting a price target of just €22.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €19.3 billion, earnings will come to €1.8 billion, and it would be trading on a PE ratio of 16.5x, assuming you use a discount rate of 7.2%.
• Given the current share price of €26.24, the analyst price target of €25.2 is 4.1% 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.