The Austin System Reinforcement Project Will Improve System Reliability And Support Customer Growth

Key Takeaways

• System modernization and strategic projects are set to improve safety, efficiency, and reliability, reducing costs and supporting revenue growth.
  
• New customer growth, demand in housing, and power generation opportunities are expected to significantly boost future revenues and earnings.
  
• Regulatory reliance and weather volatility could challenge ONE Gas’s earnings, while elevated commercial paper levels and capital investments may pressure margins and interest expenses.

Catalysts

Operates as a regulated natural gas distribution utility company in the United States.

• Completion of major system modernization projects, such as the cast iron and bare steel service line replacement, is expected to enhance safety and efficiency, reducing operational costs and potentially increasing net margins.
  
• Robust customer growth with 23,000 new meters set in 2024, along with continued demand for natural gas in new housing, is likely to drive future revenue increases.
  
• Exploration of opportunities to supply natural gas for power generation in data centers and industrial applications could significantly boost revenue by tapping into a reliable energy source demand.
  
• Successful regulatory strategy execution, including recent rate increases, is expected to bolster revenues moving forward.
  
• The Austin System Reinforcement Project and increased storage capacity are anticipated to enhance system reliability and support future customer growth, positively impacting long-term revenue and earnings.

ONE Gas Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming ONE Gas's revenue will grow by 8.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.7% today to 11.1% in 3 years time.
• Analysts expect earnings to reach $295.8 million (and earnings per share of $4.66) by about March 2028, up from $222.8 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 21.2x on those 2028 earnings, up from 20.0x 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 5.85% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.21%, as per the Simply Wall St company report.

ONE Gas Future Earnings Per Share Growth

Risks

• The warmer-than-expected weather in the fourth quarter could indicate volatility in earnings, especially if weather normalization mechanisms do not fully mitigate future impacts, potentially affecting net margins.
  
• ONE Gas faced elevated commercial paper levels at yearend, affected by storage inventories not liquidated as planned due to warmer weather, which may impact working capital management and short-term interest expenses.
  
• Significant reliance on regulatory mechanisms, such as GRIP filings in Texas and PBR in Oklahoma, introduces regulatory risk, as any adverse regulatory decisions could impact revenue recovery and future earnings.
  
• The $4.7 million increase in depreciation and amortization year-over-year, due to significant capital investment, could pressure net margins if revenue growth does not sufficiently outpace these expenses.
  
• Potential increases in interest rates, as ONE Gas does not assume further rate cuts for 2025, could lead to higher interest expenses on long-term debt, negatively impacting earnings.

Valuation

• The analysts have a consensus price target of $73.833 for ONE Gas 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 $82.0, and the most bearish reporting a price target of just $66.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.7 billion, earnings will come to $295.8 million, and it would be trading on a PE ratio of 21.2x, assuming you use a discount rate of 6.2%.
• Given the current share price of $74.29, the analyst price target of $73.83 is 0.6% 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.