Fleet Expansion With Electric Motor Drive Units Will Position Us For Future Clean Energy Opportunities

Key Takeaways

• Strategic focus on large horsepower and electric motor drive units supports revenue growth and cleaner energy market trends.
  
• Improved pricing power and cash flow efficiency enhance potential for future gross margins and long-term earnings growth.
  
• Reliance on forward-looking statements and key customer relationships presents revenue risks, while operational changes and price volatility may impact margins and earnings stability.

Catalysts

Provides natural gas compression equipment and services to the energy industry in the United States.

• The company has seen significant growth in rented horsepower, with a 17% increase in 2024 and a 55% increase over two years, largely driven by a focus on large horsepower compression units. This indicates continued revenue growth potential as more units are deployed.
  
• Natural Gas Services Group has been able to increase their monthly rental revenue per average horsepower, reflecting a 10% increase over 2023. This improvement in pricing power suggests a potential for higher future gross margins.
  
• Significant improvements in accounts receivable and working capital efficiency have released cash that can be reinvested into growth opportunities, impacting future cash flow positively.
  
• The strategic shift towards electric motor drive units within the fleet expansion effort positions the company to capitalize on market trends favoring cleaner energy, presenting opportunities for higher future revenues and margins.
  
• With material capital expenditures planned for 2025, largely on precontracted large horsepower units, the company is setting the stage for continued EBITDA growth into 2026, suggesting a long-term increase in earnings potential.

Natural Gas Services Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Natural Gas Services Group's revenue will grow by 9.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.0% today to 12.8% in 3 years time.
• Analysts expect earnings to reach $26.5 million (and earnings per share of $2.08) by about March 2028, up from $17.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.6x on those 2028 earnings, up from 15.8x today. This future PE is greater than the current PE for the US Energy Services industry at 13.8x.
• Analysts expect the number of shares outstanding to grow by 0.56% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.52%, as per the Simply Wall St company report.

Natural Gas Services Group Future Earnings Per Share Growth

Risks

• The reliance on forward-looking statements presents a risk, as actual results may differ materially from projections, potentially impacting investor confidence and future earnings.
  
• Termination of fabrication and assembly activities in Midland, Texas, could lead to decreased margins or earnings if the transition to third-party fabricators is not managed efficiently.
  
• Continued need for significant capital expenditures, especially for growth CapEx related to large horsepower units, may impact net margins if these investments do not yield expected returns.
  
• Volatility in oil and natural gas prices introduces uncertainty, which could lead to fluctuations in revenue if energy markets do not behave as anticipated.
  
• The company's reliance on a small number of large customers poses a risk to revenue and earnings stability if these relationships are disrupted or if expected contracts are not realized in the forecasted timeframes.

Valuation

• The analysts have a consensus price target of $36.25 for Natural Gas Services Group 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 $45.0, and the most bearish reporting a price target of just $32.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $206.7 million, earnings will come to $26.5 million, and it would be trading on a PE ratio of 21.6x, assuming you use a discount rate of 9.5%.
  
• Given the current share price of $21.83, the analyst price target of $36.25 is 39.8% 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.