Growth In Basins Drives Revenue But Margin Squeeze And Asset Sales Cloud Future

Key Takeaways

• Expansion in basins and joint ventures is poised to boost revenue and future earnings through increased natural gas processing capacity.
  
• Strategic capital allocation and efficient cost management promise improved margins and long-term revenue growth.
  
• Lower natural gas liquids volume, asset sales, and fee revenue reduction could negatively impact future revenue, earnings growth, and net income.

Catalysts

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

• Significant growth in the Powder River Basin and ongoing natural gas throughput records in the Delaware Basin are expected to increase revenue and positively impact future earnings.
  
• The new agreements within the Mi Vida joint venture provide WES with 100 million cubic feet per day of dedicated natural gas processing capacity starting in mid-2025, which could enhance revenue from increased throughput.
  
• The expectation of a decrease in operating and maintenance expenses in upcoming quarters can improve net margins and boost overall earnings.
  
• Plans for organic growth projects focus on volume expansion with high returns and reasonable payback periods, likely driving future revenue growth.
  
• WES's ability to allocate capital to accretive mergers and acquisitions while maintaining a strong balance sheet can lead to revenue growth and value enhancement for unitholders.

Western Midstream Partners Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Western Midstream Partners's revenue will grow by 5.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 42.2% today to 37.5% in 3 years time.
• Analysts expect earnings to reach $1.6 billion (and earnings per share of $3.9) by about November 2027, up from $1.5 billion 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 13.1x on those 2027 earnings, up from 9.2x today. This future PE is greater than the current PE for the US Oil and Gas industry at 11.0x.
• Analysts expect the number of shares outstanding to grow by 1.84% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.3%, as per the Simply Wall St company report.

Western Midstream Partners Future Earnings Per Share Growth

Risks

• Lower natural gas liquids volume under fixed recovery contracts and decreased commodity pricing could negatively impact revenue and adjusted EBITDA.
  
• Despite increased natural gas throughput, higher operation and maintenance expenses due to seasonal factors could reduce net margins.
  
• Asset sales, such as the sale of the Marcellus assets, which led to lower volumes, might limit future earnings growth.
  
• Expectations of a decline in throughput growth in 2025, alongside non-core asset sales, may lead to reduced revenue and earnings.
  
• The potential reduction in fee revenue from crude oil and natural gas assets in certain basins could negatively impact net income in 2025.

Valuation

• The analysts have a consensus price target of $40.28 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 $45.0, 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 2027, revenues will be $4.2 billion, earnings will come to $1.6 billion, and it would be trading on a PE ratio of 13.1x, assuming you use a discount rate of 8.3%.
  
• Given the current share price of $36.2, the analyst's price target of $40.28 is 10.1% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• 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.