Efficiency Measures Will Harness Increased Natural Gas Demand In Permian Basin

Key Takeaways

• Enhanced operational efficiency and strategic investments in fleet and unit deliveries could lead to revenue and earnings growth without heavy capital expenditure.
  
• Cost optimization and strategic positioning in high-demand natural gas regions could boost profitability and long-term revenue growth.
  
• Focus on existing customers and slow growth could limit diversification, while organizational changes, maintenance costs, and market shifts pose risks to margins and revenue.

Catalysts

Provides natural gas compression services in the United States.

• USA Compression Partners is focused on converting idle units to active status, resulting in a record 94.6% average horsepower utilization. This operational efficiency is expected to drive revenue and cash flow growth by increasing its revenue-generating assets without significant capital expenditure increases.
  
• The company is investing in new unit deliveries and fleet enhancements, distinguishing these capital expenditures from maintenance costs. This strategic investment should lead to increased revenue and potentially higher earnings as more horsepower becomes productive.
  
• USA Compression is adopting a shared service model with Energy Transfer, leading to anticipated annualized savings of at least $5 million by January 2026. This cost optimization is likely to enhance net margins, contributing to overall profitability improvements.
  
• In response to expected growth in natural gas demand and infrastructure projects, USA Compression is strategically placing new horsepower, particularly in high-demand areas like the Permian Basin. This positioning should bolster long-term revenue growth due to increasing demand for compression services in these regions.
  
• The anticipated increase in natural gas demand, driven by lifted LNG export restrictions and domestic infrastructure expansion, positions USA Compression to benefit significantly. This macroeconomic catalyst is expected to positively impact revenue and earnings as the company leverages its market share in key regions.

USA Compression Partners Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming USA Compression Partners's revenue will grow by 4.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.6% today to 13.6% in 3 years time.
• Analysts expect earnings to reach $146.3 million (and earnings per share of $1.24) by about April 2028, up from $82.0 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 28.1x on those 2028 earnings, down from 36.2x today. This future PE is greater than the current PE for the US Energy Services industry at 10.6x.
• Analysts expect the number of shares outstanding to grow by 0.46% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.94%, as per the Simply Wall St company report.

USA Compression Partners Future Earnings Per Share Growth

Risks

• The focus on internal utilization has resulted in a lean inventory of new horsepower entering 2025, leading to a back-end loaded capital spend, which could affect revenue growth and cash flow realization until 2026.
  
• The emphasis on existing large upstream and midstream customers and a disciplined growth rate might limit expansion opportunities with new customers, potentially impacting future revenue diversification and stability.
  
• The relocation of headquarters and organizational changes intended for cost savings and process optimization may lead to transition challenges and unexpected expenses, impacting net margins and operational efficiency in the short term.
  
• The anticipated increase in maintenance capital expenditures and conversion of idle units could pressure net income if operational efficiencies from these activities do not materialize as expected.
  
• Potential shifts in regulatory or market conditions, such as changes in natural gas demand trends or new tariffs impacting material costs, could affect revenue forecasts and operating expenses adversely.

Valuation

• The analysts have a consensus price target of $26.667 for USA Compression Partners 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 $30.0, and the most bearish reporting a price target of just $22.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.1 billion, earnings will come to $146.3 million, and it would be trading on a PE ratio of 28.1x, assuming you use a discount rate of 8.9%.
• Given the current share price of $25.27, the analyst price target of $26.67 is 5.2% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.