Expanding NGL Exports And Permian Projects Will Capitalize On Growing Energy Demand

Key Takeaways

• Expanding NGL export capacity and infrastructure projects are poised to enhance revenue and processing capabilities.
  
• Acquisitions and joint ventures are expected to improve margins and drive earnings growth through asset optimization.
  
• Heavy investment in growth projects and regulatory uncertainties could impact Energy Transfer's margins and cash flow, despite optimism about political changes.

Catalysts

Provides energy-related services.

• Energy Transfer is expanding its NGL export capacity and constructing a ninth fractionator to increase processing capabilities, which is expected to enhance future revenue through increased export and processing capacities.
  
• The integration of newly acquired Crestwood and WTG assets, and the potential synergies from these acquisitions, along with the new Permian joint venture with SUN, are expected to improve net margins and drive earnings growth by optimizing the asset base and service offerings.
  
• Energy Transfer plans to enhance its natural gas infrastructure to capitalize on growing demand from AI data centers and natural gas-fired power plants, which could boost future revenues and utilization rates across its extensive pipeline network.
  
• Ongoing expansions in the Permian Basin, including new processing plants and pipeline connections, are likely to support increased throughput and higher earnings due to growing production volumes.
  
• Strategic growth projects like the Warrior pipeline initiative and power generation facilities to meet the increasing natural gas demand highlight Energy Transfer's potential to realize revenue growth and operating leverage by expanding its service capacity and geographic reach.

Energy Transfer Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Energy Transfer's revenue will grow by 3.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.5% today to 6.9% in 3 years time.
• Analysts expect earnings to reach $6.4 billion (and earnings per share of $1.84) by about December 2027, up from $4.6 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 $4.8 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.6x on those 2027 earnings, up from 13.9x today. This future PE is greater than the current PE for the US Oil and Gas industry at 10.9x.
• Analysts expect the number of shares outstanding to grow by 0.37% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.02%, as per the Simply Wall St company report.

Energy Transfer Future Earnings Per Share Growth

Risks

• Energy Transfer experienced a decline in adjusted EBITDA for the NGL and Refined Products segment, primarily due to lower gains from hedged NGL inventories, which could negatively impact net margins.
  
• The interstate natural gas segment saw a decline in adjusted EBITDA due to lower IT utilization in dry gas areas affected by lower gas prices and weaker spreads, which could adversely affect earnings.
  
• Increase in operating expenses due to the absence of a one-time benefit and higher maintenance project costs could impact net margins and profitability in the interstate natural gas segment.
  
• Dependence on political changes and regulatory outcomes, which were mentioned with optimism during the call, represent significant uncertainty and risk that could affect future revenues and project developments.
  
• Energy Transfer is heavily investing in organic growth projects and acquisitions, which brings execution risk and could strain cash flow and impact net margins if expected returns are not realized.

Valuation

• The analysts have a consensus price target of $20.79 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 $24.0, and the most bearish reporting a price target of just $17.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $92.8 billion, earnings will come to $6.4 billion, and it would be trading on a PE ratio of 14.6x, assuming you use a discount rate of 9.0%.
• Given the current share price of $18.64, the analyst's price target of $20.79 is 10.3% 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.