Integration Of ONEOK's Pipelines And New Power Projects Will Improve Connectivity And Cash Flow Stability

Key Takeaways

• Acquisition of Midwest pipeline assets strengthens supply and market connectivity, supporting revenue growth through expanded natural gas operations.
  
• New power generation projects and fully funded project backlog enhance long-term revenue predictability and earnings growth prospects.
  
• Depressed natural gas prices, political uncertainty, and integration challenges threaten revenue, margins, and growth, while project delays and execution risks could further impede expansion.

Catalysts

Provides integrated natural gas services in the United States.

• The acquisition of ONEOK's Midwest pipeline assets and the integration into DTM's network are expected to enhance supply and market connectivity, supporting future revenue growth through expanded interstate natural gas operations.
  
• The company announced two new utility-scale power generation projects, which are expected to add long-term firm service contracts. This increases expected revenue by supporting stable, predictable cash flows as new projects come into service in 2026 and 2028.
  
• DTM expanded its project backlog to $2.3 billion over the 2025-2029 period, which is fully funded by cash flow. This enhances long-term organic growth rate projections of 5%-7%, impacting overall earnings growth.
  
• The company is optimistic about a favorable shift in market fundamentals, such as higher natural gas prices and growing LNG demand, expected to improve operational utilization rates and boost revenue.
  
• Anticipated upgrades to an investment-grade rating by S&P and Moody's in 2025 will likely lower the cost of capital, positively impacting net margins and boosting future earnings potential.

DT Midstream Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming DT Midstream's revenue will grow by 12.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 36.1% today to 38.9% in 3 years time.
• Analysts expect earnings to reach $548.0 million (and earnings per share of $5.35) by about March 2028, up from $354.0 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 27.2x on those 2028 earnings, up from 25.2x today. This future PE is greater than the current PE for the US Oil and Gas industry at 12.3x.
• Analysts expect the number of shares outstanding to grow by 4.38% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.0%, as per the Simply Wall St company report.

DT Midstream Future Earnings Per Share Growth

Risks

• Depressed natural gas prices and producer slowdowns present a risk to revenue, as they can lead to reduced demand for DT Midstream's services and slower volume growth.
  
• Uncertainty in the political environment and pauses in new LNG export permits may lead to reduced expansion opportunities, impacting future revenue and growth potential.
  
• Integration challenges and potential costs from the Midwest pipeline acquisition could affect net margins and earnings if synergies or cost efficiencies are not realized as expected.
  
• Delays in timeline for CCS (carbon capture and storage) projects due to regulatory approvals could hinder future revenue and strategic growth initiatives.
  
• Project reliance on highly probable growth assumptions from backlog opportunities means unexpected setbacks or lower-than-expected execution could impact projected earnings and long-term revenue growth.

Valuation

• The analysts have a consensus price target of $102.783 for DT Midstream 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 $115.0, and the most bearish reporting a price target of just $85.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.4 billion, earnings will come to $548.0 million, and it would be trading on a PE ratio of 27.2x, assuming you use a discount rate of 8.0%.
  
• Given the current share price of $88.13, the analyst price target of $102.78 is 14.3% 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.