Capital Expenditures On Pathfinder Pipeline Will Impact Profit Margins Ahead

Key Takeaways

• Significant capital expenditures on infrastructure projects may impact net margins and free cash flow, delaying profitability and revenue growth.
  
• Amendments to water agreements and competitive pressures may affect short-term earnings and challenge anticipated long-term revenue growth.
  
• Strategic expansions and strong partnerships may lead to sustained revenue and profit growth, supported by robust cash flow and operational efficiency improvements.

Catalysts

Operates as a midstream energy company primarily in the United States.

• The expansion of produced water gathering and disposal infrastructure and the introduction of the Pathfinder pipeline in the Delaware Basin could increase capital expenditures significantly, potentially impacting future net margins by increasing operational costs before profitability can be achieved.
  
• Amendments to existing produced water agreements, while extending contract terms, may lead to slightly decreased adjusted gross margins in the short term as a result of adjustments in cost of service rates, affecting earnings in the near term.
  
• The decision to allocate significant portions of future capital expenditure budgets to projects like the Pathfinder pipeline and expansion in the Powder River Basin suggests a capital-intensive strategy that may not yield immediate revenue increases, impacting short-term free cash flow.
  
• While Western Midstream Partners plans to prioritize organic growth projects, the retirement of its enhanced distribution concept might result in a slower pace of distribution growth, potentially affecting shareholder returns and perceptions of profitability growth.
  
• The competitive landscape for produced water management in the Permian Basin could affect Western Midstream Partners' ability to fill the Pathfinder pipeline and achieve expected return multiples, thereby impacting anticipated revenue growth and long-term earnings projections.

Western Midstream Partners Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Western Midstream Partners's revenue will grow by 4.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 42.6% today to 37.0% in 3 years time.
• Analysts expect earnings to remain at the same level they are now, that being $1.5 billion (with an earnings per share of $4.01). However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $1.3 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.9x on those 2028 earnings, up from 10.3x today. This future PE is greater than the current PE for the US Oil and Gas industry at 12.7x.
• Analysts expect the number of shares outstanding to grow by 0.22% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.32%, as per the Simply Wall St company report.

Western Midstream Partners Future Earnings Per Share Growth

Risks

• The large expansion of Western Midstream's produced water gathering and disposal infrastructure, including the Pathfinder pipeline and its long-term agreements with Occidental Petroleum, may support sustained revenue growth and increased margins in the coming years.
  
• Record throughput growth across natural gas, crude oil, and produced water in 2024, along with a strong 2025 growth outlook, indicates potential for continued revenue increases and margin stability.
  
• A strong capital allocation strategy, targeting mid
• to low single-digit annual percentage distribution growth and supported by robust cash flow generation, could lead to higher earnings and increased shareholder value.
  
• The company's strategic investments in organic growth projects and accretive bolt-on acquisitions, coupled with enhanced operational efficiency, are likely to bolster profitability and drive free cash flow growth.
  
• Robust partnerships and stable long-term contracts with minimum volume commitments, particularly in the Delaware Basin, provide a solid foundation for steady revenue increase and profit margins protection.

Valuation

• The analysts have a consensus price target of $40.833 for Western Midstream 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 $46.0, and the most bearish reporting a price target of just $36.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $4.2 billion, earnings will come to $1.5 billion, and it would be trading on a PE ratio of 12.9x, assuming you use a discount rate of 8.3%.
• Given the current share price of $41.58, the analyst price target of $40.83 is 1.8% lower. 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.