Projects Like Hugh Brinson Pipeline Will Expand Capacity To Meet Future Natural Gas Demand

Key Takeaways

• Strategic investments in pipeline and processing infrastructure are poised to boost revenue through enhanced transportation and processing capacity.
  
• Expanding NGL export capabilities and power generation facilities could drive future revenue by capturing international demand and increasing natural gas usage.
  
• Energy Transfer's growth strategy is challenged by low natural gas prices, high CapEx, operational costs, and regulatory risks, potentially affecting margins and earnings.

Catalysts

Provides energy-related services in the United States.

• The construction of the Hugh Brinson Pipeline will expand transportation capacity from the Permian Basin to Texas, potentially increasing revenue from the intrastate natural gas segment.
  
• Energy Transfer is focusing on enhancing NGL export capabilities through projects like the Flexport expansion and Marcus Hook terminal upgrades, which could boost future revenue from higher international demand for NGLs.
  
• Midstream segment investments, including new processing plants such as the Mustang Draw plant, are expected to optimize Permian Basin operations. This could enhance earnings by supporting increased throughput and processing capacity.
  
• The expansion of power generation facilities, especially with data centers like the partnership with CloudBurst, positions Energy Transfer to capture growing natural gas demand, potentially increasing future earnings.
  
• Strategic capital investments in organic growth projects, with projected mid-to-upper teen returns, are expected to significantly enhance adjusted EBITDA and earnings in 2026 and 2027.

Energy Transfer Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Energy Transfer's revenue will grow by 5.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.3% today to 6.5% in 3 years time.
• Analysts expect earnings to reach $6.3 billion (and earnings per share of $1.82) by about March 2028, up from $4.4 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $7.8 billion in earnings, and the most bearish expecting $4.9 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.1x on those 2028 earnings, up from 14.6x today. This future PE is greater than the current PE for the US Oil and Gas industry at 12.7x.
• Analysts expect the number of shares outstanding to grow by 1.82% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.3%, as per the Simply Wall St company report.

Energy Transfer Future Earnings Per Share Growth

Risks

• Energy Transfer faces decreased volumes in dry gas regions due to low natural gas pricing, which could negatively impact revenue and net margins.
  
• The company's $5 billion planned CapEx for 2025 on organic growth might strain financials, particularly if project returns fall short of expectations, impacting future earnings.
  
• Lower transportation revenue on key pipelines like the Bakken pipeline and reduced earnings from marketing could weaken overall revenue and profit margins.
  
• Increased operating expenses from recent acquisitions and projects, such as the Crestwood and WTG additions, may pressure net margins if not offset by corresponding revenue growth.
  
• Higher regulatory burden or changes in policy may delay project timelines, such as for the Lake Charles LNG project, thus impacting the realization of anticipated earnings growth.

Valuation

• The analysts have a consensus price target of $22.732 for Energy Transfer 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 $25.0, and the most bearish reporting a price target of just $19.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $96.3 billion, earnings will come to $6.3 billion, and it would be trading on a PE ratio of 17.1x, assuming you use a discount rate of 9.3%.
• Given the current share price of $18.68, the analyst price target of $22.73 is 17.8% 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.