Bakken East Pipeline Expansion Will Support Future Energy Demand

Key Takeaways

• Spin-off of Everest enables a focused energy delivery strategy for MDU, enhancing potential revenue growth.
  
• Record pipeline earnings and strategic infrastructure investments boost growth prospects, while capital investments aim for shareholder value increases.
  
• Spin-offs and rising expenses may impact earnings and margins, with regulatory and capital needs posing additional risks to financial stability.

Catalysts

Engages in the regulated energy delivery businesses in the United States.

• The spin-off of Everest Construction Group has allowed MDU Resources to transform into a pure-play regulated energy delivery business, positioning the company for future revenue growth given a more focused business strategy.
  
• The Pipeline segment achieved record earnings with a 45% year-over-year increase driven by record transportation volumes and increased storage revenue, indicating potential revenue growth and margin expansion as demand for services continues to rise.
  
• The Electric segment experienced earnings growth primarily due to rate relief and the addition of data center loads, suggesting a potential impact on revenue growth as more data centers come online in the coming years.
  
• Ongoing and future investments in the pipeline infrastructure, such as the acquisition of a natural gas pipeline and potential expansion projects like the Bakken East Pipeline, are expected to enhance future earnings by catering to increasing customer demand.
  
• Anticipated capital investments of $3.1 billion over the next five years, coupled with a targeted long-term earnings per share growth rate of 6% to 8%, suggest meaningful prospects for future earnings growth and increased shareholder value.

MDU Resources Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming MDU Resources Group's revenue will grow by 4.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.3% today to 11.2% in 3 years time.
• Analysts expect earnings to reach $224.0 million (and earnings per share of $1.08) by about March 2028, up from $181.1 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 21.7x on those 2028 earnings, up from 19.0x today. This future PE is greater than the current PE for the US Gas Utilities industry at 19.4x.
• 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 6.25%, as per the Simply Wall St company report.

MDU Resources Group Future Earnings Per Share Growth

Risks

• The spin-offs of Everest and Knife River have led to dissynergies, which are expected to cause a negative impact of approximately $0.04 per share on earnings in 2025, affecting net margins and earnings.
  
• The pipeline segment experienced higher operation and maintenance expenses, as well as higher depreciation and amortization, which could impact future net margins if these expenses continue to rise.
  
• There is potential volatility in storage revenue, which may not be as strong in 2025 as it was in 2024. This variability could impact revenues and result in lower earnings if storage revenues weaken.
  
• The regulatory landscape poses a risk, with several ongoing rate cases that could affect pricing and revenues if favorable outcomes are not achieved, potentially impacting overall net margins.
  
• The guidance provided for 2025 indicates a potential for no equity issuance yet hints at the necessity for capital to support 2026 projects, which could affect cash flow and financial flexibility if not managed well.

Valuation

• The analysts have a consensus price target of $19.75 for MDU Resources 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 $24.0, and the most bearish reporting a price target of just $18.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.0 billion, earnings will come to $224.0 million, and it would be trading on a PE ratio of 21.7x, assuming you use a discount rate of 6.3%.
• Given the current share price of $16.85, the analyst price target of $19.75 is 14.7% 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.