Increasing Stake In EPIC Crude To 275% Will Strengthen Pipeline Operations

Key Takeaways

• Expansion into the Delaware Basin and strategic M&A are positioned to drive future revenue growth for Kinetik Holdings.
  
• Long-term natural gas demand growth aligns with Kinetik's strategic positioning, suggesting potential for significant revenue increases.
  
• Operational risks from negative gas prices, reliance on electricity OpEx, and project execution challenges could pressure revenue, profitability, and financial flexibility.

Catalysts

Through its subsidiaries, operates as a midstream company in the Texas Delaware Basin.

• Kinetik's expansion into the Delaware Basin, including strategic M&A and organic growth, notably with the acquisition of Durango Permian and the 15-year gas gathering in Eddy County, is positioned to drive future revenue growth.
  
• The anticipated start-up of the Kings Landing Complex and its subsequent ramp-up in processing capacity is expected to enhance Kinetik's revenue and adjusted EBITDA through increased gas processed volumes.
  
• Kinetik's exploration into a greenfield gas-fired power generation facility in Reeves County is intended to optimize electricity operational expenses, potentially improving net margins over the long term.
  
• Incremental equity interest in EPIC Crude to 27.5% is set to bolster pipeline transportation segment growth, positively impacting earnings and providing a steady cash flow.
  
• Long-term natural gas demand growth, driven by LNG exports and U.S. Gulf Coast industrial demand, aligns with Kinetik's strategic positioning, suggesting potential for significant revenue increases through the end of the decade.

Kinetik Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Kinetik Holdings's revenue will grow by 23.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.1% today to 10.1% in 3 years time.
• Analysts expect earnings to reach $283.0 million (and earnings per share of $2.77) by about April 2028, up from $61.2 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $442.4 million in earnings, and the most bearish expecting $123.6 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 41.0x on those 2028 earnings, down from 41.3x 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 0.61% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.4%, as per the Simply Wall St company report.

Kinetik Holdings Future Earnings Per Share Growth

Risks

• The unexpected negative Waha gas prices led to volume curtailments, highlighting operational and pricing risks that could negatively impact revenue and net margins.
  
• The reliance on electricity OpEx management is crucial due to rising power costs; failure to optimize this could strain net margins.
  
• Heavily relying on new project startups like Kings Landing II introduces execution risk, which could affect future earnings growth if timelines or budgets aren't met.
  
• Growth projections assume significant expansion in processing capacity and market share, but heightened competition or regulatory challenges could temper revenue increases.
  
• Increased leverage from recent acquisitions could pressure financial flexibility and profitability if anticipated growth doesn't materialize as quickly.

Valuation

• The analysts have a consensus price target of $58.571 for Kinetik 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 $70.0, and the most bearish reporting a price target of just $42.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.8 billion, earnings will come to $283.0 million, and it would be trading on a PE ratio of 41.0x, assuming you use a discount rate of 7.4%.
• Given the current share price of $42.04, the analyst price target of $58.57 is 28.2% 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.