New Leadership, Strong Market Demand, And Decisive Enhancements Drive Growth Potential

Key Takeaways

• New leadership may enhance strategic perspectives, improving financial management and business development, positively impacting earnings.
  
• Strong market demand and fleet optimization are expected to drive revenue growth, boost efficiency, and increase revenue-generating capacity.
  
• Dependency on Energy Transfer and increased operational costs may impact revenue stability and net margins, with expansion and interest expenses posing additional risks.

Catalysts

Provides natural gas compression services in the United States.

• The appointment of a new CEO, Clint Green, and a new CFO, Chris Paulsen, could bring fresh strategic perspectives and expertise, potentially leading to improved financial management and business development, impacting earnings positively.
  
• A supportive market environment for compression services, with strong demand from customers, is allowing for increased pricing and deployment of horsepower. This is expected to drive continued revenue growth.
  
• The conversion of idle units to active status and the strategic deployment of uncontracted fleet assets at lower capital costs is expected to enhance operational efficiency and increase revenue-generating capacity.
  
• The implementation of Energy Transfer shared services is expected to streamline back-office operations, which could result in lower G&A expenses and improved net margins.
  
• Increased expansion capital expenditures for fleet reconfigurations are anticipated to enhance operational capabilities, potentially increasing revenue and earnings in the long term.

USA Compression Partners Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming USA Compression Partners's revenue will grow by 5.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.7% today to 16.5% in 3 years time.
• Analysts expect earnings to reach $179.6 million (and earnings per share of $1.49) by about November 2027, up from $62.6 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 22.4x on those 2027 earnings, down from 43.1x today. This future PE is greater than the current PE for the US Energy Services industry at 17.3x.
• Analysts expect the number of shares outstanding to grow by 1.1% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.47%, as per the Simply Wall St company report.

USA Compression Partners Future Earnings Per Share Growth

Risks

• The increase in cash interest expenses due to higher average outstanding borrowings, despite being partially mitigated by a fixed rate interest rate swap, could impact net margins.
  
• Expansion capital expenditures exceeding initial forecasts owing to costs for converting idle units to active status may affect net earnings if not managed carefully.
  
• The need for reconfiguration and enhancements for redeployed units could increase operational expenses, putting pressure on future net margins.
  
• A dependency on a single customer (Energy Transfer, via acquisition of WTG) accounting for a significant portion of revenue poses a concentration risk that may impact revenue stability.
  
• Potential delays or unpredicted impacts from implementing the Energy Transfer shared services model could lead to inefficiencies or unexpected costs, adversely affecting net margins.

Valuation

• The analysts have a consensus price target of $24.83 for USA Compression Partners based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $1.1 billion, earnings will come to $179.6 million, and it would be trading on a PE ratio of 22.4x, assuming you use a discount rate of 10.5%.
  
• Given the current share price of $23.04, the analyst's price target of $24.83 is 7.2% 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.