NGCS, TOPS And LNG Demand Will Improve Operational Efficiency

Key Takeaways

• Operational transformation, asset investments, and technology advancements are driving growth, improving efficiency, and boosting revenue and earnings.
  
• Integration of acquisitions expands scale and reach, enhancing revenue and margins through synergies and strong market fundamentals support earnings stability.
  
• Market uncertainties, Permian growth slowdown, and aggressive capital moves may impact Archrock's revenue and financial flexibility amidst tight labor and tech shifts.

Catalysts

Operates as an energy infrastructure company in the United States.

• Archrock's operational transformation and ongoing investments in high-quality assets, innovative processes, and technology are driving consistent success, positioning the company for growth. This is likely to positively impact revenue and earnings as these investments enhance operational efficiency and service delivery.
  
• The integration of recent acquisitions such as NGCS and TOPS is expected to increase Archrock's scale, customer relationships, and operational reach in key regions, contributing to revenue growth and improved margins through synergies.
  
• Strong market fundamentals, such as historically high levels of fleet utilization and substantial contracted backlog for 2025–2026, support revenue stability and growth, enhancing earnings reliability despite macroeconomic volatility.
  
• Archrock's commitment to maintaining a solid balance sheet, with a record-low leverage ratio and a focus on prudent capital allocation, strengthens its financial flexibility, supporting stable earnings and enabling continued shareholder returns through dividends and share repurchases.
  
• The increasing global demand for natural gas, driven by LNG exports, domestic power generation, and the emergence of AI data centers, indicates a need for expanded natural gas infrastructure in the U.S., such as compression, which is expected to drive long-term revenue growth for Archrock.

Archrock Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Archrock's revenue will grow by 13.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 16.2% today to 22.7% in 3 years time.
• Analysts expect earnings to reach $406.5 million (and earnings per share of $2.04) by about May 2028, up from $200.3 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 20.5x on those 2028 earnings, down from 21.0x today. This future PE is greater than the current PE for the US Energy Services industry at 10.6x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.83%, as per the Simply Wall St company report.

Archrock Future Earnings Per Share Growth

Risks

• The uncertainty and volatility in WTI prices due to OPEC's actions and tariff announcements could impact future earnings, particularly if they lead to changes in customers' development plans or capital programs.
  
• The potential slowdown in Permian growth and the need for gas from other basins may affect revenue, as the compression intensity in dry gas basins like the Haynesville is lower than in the Permian.
  
• Continued reliance on customer commitments despite macroeconomic headwinds poses risks if customers decide to delay projects or renegotiate contracts, which could impact revenue.
  
• The tight labor market and potential shifts in technology needs could increase operational costs and decrease net margins, particularly if further investments in fleet modernization are required.
  
• The company's aggressive capital allocation, including a $50 million increase in their share repurchase program, could strain financial flexibility if market conditions worsen, potentially affecting the balance sheet and future earnings.

Valuation

• The analysts have a consensus price target of $30.875 for Archrock based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.8 billion, earnings will come to $406.5 million, and it would be trading on a PE ratio of 20.5x, assuming you use a discount rate of 7.8%.
  
• Given the current share price of $23.92, the analyst price target of $30.88 is 22.5% higher.
  
• 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.