Bolstering Earnings Through Critical Acquisitions And Operational Efficiency In Oil And Gas Industry

Key Takeaways

• Strategic acquisitions and operational momentum signal positive future earnings growth, suggesting the stock is undervalued.
  
• Focus on operational efficiencies and a disciplined capital allocation strategy indicate a sustainable approach to boosting net margins and earnings per share.
  
• Fluctuating Permian basin production, variable fee-based cash flow, operational challenges, uncertain market opportunities, and acquisition integration could significantly affect financial outcomes.

Catalysts

Through its subsidiary, Plains All American Pipeline, L.P., owns and operates midstream infrastructure systems in the United States and Canada.

• The company's robust performance and revision of the full-year 2024 adjusted EBITDA guidance upwards, supported by contributions from bolt-on M&A and operational momentum, suggest a positive impact on future earnings and growth capital, underpinning an undervalued stock perspective.
  
• Strategic bolt-on acquisitions, totaling approximately $535 million net to Plains, enhance the financial profile by complementing existing asset base and creating incremental growth opportunities, potentially impacting revenue and net margins positively due to synergies and efficient growth.
  
• The notable focus on operational efficiencies and lower-than-expected operating expenses across crude oil and NGL segments, despite some reversals expected in H2, indicate a sustainable approach to cost management likely positively affecting net margins.
  
• The disciplined capital allocation strategy, expected to generate substantial adjusted free cash flow, and the strategic use of this cash flow for common and preferred distributions, speak to an effective use of capital that could bolster earnings per share.
  
• The anticipation of more durable and resilient cash flows, driven by contract extensions in the Permian Long-Haul business and a shift towards more stable fee-based cash flow in the NGL segment, suggests a long-term positive impact on revenue and earnings stability, supporting the notion that the stock might be currently undervalued.

Assumptions

• Analysts are assuming Plains GP Holdings's revenue will decrease by -1.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.3% today to 1.0% in 3 years time.
• Analysts expect earnings to reach $466.4 million (and earnings per share of $2.33) by about October 2027, up from $162.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.8x on those 2027 earnings, down from 22.5x today. This future PE is greater than the current PE for the US Oil and Gas industry at 10.5x.
• Analysts expect the number of shares outstanding to decline by 4.9% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 10.74%, as per the Simply Wall St company report.

Risks

• A decline in Permian basin production growth or failure to meet the projected increase of 200,000 to 300,000 barrels a day could impact revenue and earnings.
  
• Fluctuations in the fee-based cash flow, especially in the NGL segment amidst a shift towards more stable fee-based contracts, could affect the predictability and stability of earnings.
  
• Operational challenges, including increased operating costs in the second half of the year due to deferred expenses, may impact net margins.
  
• Market-based opportunities and favorable spreads, like the iso-to-normal butane spreads, are not guaranteed to continue, potentially affecting revenue from opportunistic captures.
  
• The success of bolt-on acquisitions and their integration could impact financial performance if anticipated synergies and efficient growth opportunities are not fully realized.

Valuation

• The analysts have a consensus price target of $20.21 for Plains GP Holdings 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 $23.0, and the most bearish reporting a price target of just $17.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $46.9 billion, earnings will come to $466.4 million, and it would be trading on a PE ratio of 11.8x, assuming you use a discount rate of 10.7%.
• Given the current share price of $18.5, the analyst's price target of $20.21 is 8.5% higher. 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.