Investment In Natural Gas Infrastructure And Technology Will Shape Future Success

Key Takeaways

• Focus on natural gas infrastructure and technology improvements to boost revenue and margins through increased efficiency and reliability.
  
• Strong future cash flow anticipated from extensive bookings and aligned environmental compliance efforts to drive growth.
  
• High debt levels and substantial capital expenditures pose financial risks, especially if market conditions change or expected returns are not achieved.

Catalysts

Operates as an energy infrastructure company in the United States.

• Archrock plans to capitalize on increased natural gas production and demand for compression in 2025 as part of a structural change towards significant investment in natural gas infrastructure. This is expected to increase revenue as they fulfill the need for new equipment and services.
  
• The company aims to maximize service reliability and efficiency through the adoption of innovative technology and standardization of field operations, which can reduce operational costs and improve net margins.
  
• The planned expansion of Archrock's electric motor drive fleet offers environmental benefits, enhancing customer uptime and operational efficiency, potentially leading to higher earnings and improved net margins.
  
• There is a substantial contracted backlog for 2025, with bookings extending into 2026, which points to strong future cash flow and revenue growth anticipated from sustained customer demand for new equipment.
  
• Archrock's focus on technological advancements, such as methane emissions detection and measurement solutions, aligns with industry trends for environmental compliance and could create new revenue streams, thereby impacting earnings positively.

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 14.7% today to 21.9% in 3 years time.
• Analysts expect earnings to reach $368.0 million (and earnings per share of $2.1) by about April 2028, up from $170.0 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 23.0x on those 2028 earnings, down from 24.4x today. This future PE is greater than the current PE for the US Energy Services industry at 10.3x.
• 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 8.19%, as per the Simply Wall St company report.

Archrock Future Earnings Per Share Growth

Risks

• There is uncertainty surrounding the forward-looking statements, as management can give no assurance that expectations will be met. This could negatively impact future revenues and earnings if projections are not realized.
  
• Increased leverage with a year-end ratio of 3.3x suggests potential risk associated with the company's significant debt, which could impact net margins and earnings if market conditions change and affect cash flow or if interest rates rise.
  
• Significant capital expenditures planned for 2025, totaling between $470 million and $535 million, could strain the company’s financial resources and impact net margins if returns from these investments do not meet expectations.
  
• Supply chain risks, including potential equipment delays and the impact of tariffs on new equipment, could affect the timing of revenue generation and might increase costs, impacting profitability.
  
• The company's reliance on continued high demand for compression services, particularly in the Permian Basin, presents a risk if demand diminishes or if competitors capture market share, potentially impacting future revenue streams.

Valuation

• The analysts have a consensus price target of $31.125 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 $1.7 billion, earnings will come to $368.0 million, and it would be trading on a PE ratio of 23.0x, assuming you use a discount rate of 8.2%.
• Given the current share price of $23.58, the analyst price target of $31.12 is 24.2% 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.