Tiger II Plant And Decisive Expansions Set To Ignite Growth In The Energy Sector

Key Takeaways

• Expansion in the Permian and Louisiana indicates a strategy focused on increasing natural gas processing and storage capacities to meet market demands.
  
• Simplifying the capital structure and an active unit repurchase program reflect efforts to enhance financial health and return capital to investors.
  
• EnLink Midstream's strategic, operational, and financial challenges hint at potential impacts on future growth, earnings volatility, and profitability across various geographic segments.

Catalysts

Provides midstream energy services in the United States.

• The introduction of the Tiger II plant in the Permian is expected to boost capacity and support higher gas gathering volumes, enhancing segment profit and operational efficiency, which could lead to increased revenue and improved earnings.
  
• The near-to-mid-term plan to possibly add another processing plant in the Midland Basin reflects ongoing investment in capital-efficient projects, projecting growth in natural gas processing capacity which could contribute to revenue growth and margin expansion in the Permian segment.
  
• The expansion of natural gas storage assets in Louisiana, especially the expansion of Jefferson Island Storage Hub, is set to meet evolving market demands, indicating potential for higher storage revenues and increased contribution to EBITDA from the Louisiana segment.
  
• Efforts to simplify the capital structure, notably through the significant reduction in Series B preferred stock, aim to improve the balance sheet, potentially leading to reduced financial costs and enhanced net margins.
  
• The active unit repurchase program, with $50 million spent in the second quarter and a total of over 10% of units repurchased over two years, signals a strong commitment to returning capital to investors, potentially supporting earnings per share growth through reduced share count.

Assumptions

• Analysts are assuming EnLink Midstream's revenue will grow by 16.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.5% today to 6.5% in 3 years time.
• Analysts expect earnings to reach $670.2 million (and earnings per share of $0.74) by about November 2027, up from $100.1 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 26.6x on those 2027 earnings, down from 71.6x today. This future PE is greater than the current PE for the US Oil and Gas industry at 11.8x.
• Analysts expect the number of shares outstanding to grow by 25.2% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.53%, as per the Simply Wall St company report.

Risks

• The inability of EnLink and ExxonMobil to identify alternative CO2 transportation projects after deprioritizing the Pecan Island CCS project may suggest difficulties in executing its strategic initiatives, potentially impacting future growth opportunities and earnings.
  
• A decrease in segment profit in Louisiana in the second quarter of 2024 compared to the previous quarter, reflecting both seasonality and a decrease from the previous year, indicates potential volatility in earnings and impacts on net margins in this geographic segment.
  
• In North Texas, a decrease in segment profit from the prior year quarter, driven by the impact of a one-time contract reset, highlights the risk of contract renegotiations leading to lower revenues and affecting net margins.
  
• The mention of plant relocation expenses and unrealized derivative losses in the Permian and Oklahoma segments indicates operational and financial risks that can impact the company’s net margins and overall profitability.
  
• Heavy reliance on the normal winter seasonal strength in its Louisiana NGL business for the second half of 2024 earnings implies a risk of revenue volatility and potential impact on earnings if expected seasonal patterns do not materialize as planned.

Valuation

• The analysts have a consensus price target of $15.45 for EnLink Midstream 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 2027, revenues will be $10.4 billion, earnings will come to $670.2 million, and it would be trading on a PE ratio of 26.6x, assuming you use a discount rate of 8.5%.
• Given the current share price of $15.6, the analyst's price target of $15.45 is 0.9% 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.