Methane Capture Adoption And Rental Expansion Will Drive Stronger Long Term Earnings Potential

Catalysts

About Flowco Holdings

Flowco Holdings provides production optimization solutions, including high pressure gas lift and vapor recovery rentals, that help oil and gas operators enhance recovery and returns.

What are the underlying business or industry changes driving this perspective?

• Continued expansion of the high pressure gas lift rental fleet, supported by stable North American oil production and deeper penetration with blue chip customers, is expected to lift recurring rental revenue and support further EBITDA margin expansion.
• Growing adoption of vapor recovery units as methane capture becomes embedded in pad design and more Permian gas reaches premium markets is likely to drive higher unit deployments, increasing rental revenue density and free cash flow conversion.
• Internally developed software and machine learning tools that optimize surface equipment and integrate field data are beginning to reduce maintenance and operating costs, which may structurally improve segment margins and earnings quality over time.
• Ongoing consolidation and optimization of manufacturing capacity, including the shift to the El Reno center of excellence, enhances vertical integration and operating leverage, which can support higher net margins even if product sales remain cyclical.
• Disciplined capital allocation that balances rental fleet growth, opportunistic M&A and active share repurchases, funded by free cash flow and low leverage, is intended to enhance per share earnings growth and support a potential re rating of the equity.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Flowco Holdings's revenue will grow by 6.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.2% today to 22.5% in 3 years time.
• Analysts expect earnings to reach $204.2 million (and earnings per share of $1.45) by about December 2028, up from $46.5 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $226.2 million in earnings, and the most bearish expecting $174.2 million.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 5.6x on those 2028 earnings, down from 11.0x today. This future PE is lower than the current PE for the US Energy Services industry at 18.4x.
• 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 7.29%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The North American upstream landscape remains dynamic in a lower commodity price environment. A renewed downturn in oil or gas prices could reduce operator activity and pressure both rental deployments and product sales, weighing on revenue and earnings growth over time.
• Management is accelerating and reallocating organic capital with roughly a six month lead time into HPGL and VRU rentals based on current demand. If long term natural gas or oil fundamentals soften or operators pivot away from optimization spending, Flowco could face underutilized assets that compress returns on capital and net margins.
• Natural Gas Technologies revenue declined 21% sequentially and companywide product sales are already soft. If this weaker product demand proves structural rather than cyclical as customers defer or redesign capex, the planned mix shift toward rentals may not fully offset volume decline, limiting top line growth and EBITDA expansion.
• The integration of acquired fleets and ongoing consolidation of manufacturing into a center of excellence are intended to create operating leverage. Further rationalization or missteps in optimizing the supply chain could lead to execution issues, customer disruption and higher than expected costs that erode margin gains and free cash flow.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $26.75 for Flowco Holdings 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 $28.0, and the most bearish reporting a price target of just $24.0.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be $908.1 million, earnings will come to $204.2 million, and it would be trading on a PE ratio of 5.6x, assuming you use a discount rate of 7.3%.
  
• Given the current share price of $18.09, the analyst price target of $26.75 is 32.4% 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.