Reducing Capital Intensity And Texas Initiatives Will Secure Stability

Key Takeaways

• Operational efficiencies and strategic projects could improve net margins and expand revenue through reduced costs and customer base growth.
  
• Regulatory initiatives and supply chain strategies may enhance revenue and stabilize costs, supporting earnings growth over the long term.
  
• Regulatory challenges, rising interest and O&M expenses, and weather dependencies pose risks to profitability, while post-2025 supply uncertainties could impact capital expenditure and growth.

Catalysts

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

• ONE Gas plans to derisk its 5-year financial plan by reducing capital intensity, which could potentially lead to an increase in earnings per share CAGR to approximately 6% through 2029, impacting earnings growth.
  
• The company's regulatory initiatives, including rate adjustments in various service areas such as Oklahoma, Texas, and Kansas, are expected to enhance revenue through more timely capital recovery, impacting future revenue positively.
  
• Operational efficiencies through in-sourcing processes like line locating are aimed at managing and reducing O&M expenses, which may help improve net margins over time.
  
• Strategic infrastructure projects, like the Austin system reinforcement and the integration of renewable natural gas projects in Texas, demonstrate growth initiatives that could lead to increased revenue and customer base expansion.
  
• ONE Gas is maintaining strong supply chain relationships to shield against tariff impacts and inflationary pressures, potentially stabilizing or even reducing cost of goods sold, thus positively affecting net margins.

ONE Gas Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming ONE Gas's revenue will grow by 4.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.7% today to 11.6% in 3 years time.
• Analysts expect earnings to reach $300.8 million (and earnings per share of $4.73) by about May 2028, up from $243.0 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 21.4x on those 2028 earnings, up from 19.9x today. This future PE is greater than the current PE for the US Gas Utilities industry at 19.1x.
• Analysts expect the number of shares outstanding to grow by 5.94% 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

• Potential challenges with legislation such as the Texas HB4384 and other regulatory dynamics could impact the company's ability to adjust rates or influence its investment cycle, potentially affecting revenue and profitability.
  
• The company anticipates higher interest expenses due to maturing lower-coupon notes and additional issuances of debt, which could impact net margins and overall earnings.
  
• O&M expenses, while well-managed currently, could be subject to upward pressure due to wage growth and other inflationary factors, impacting net margins unless efficiency gains continue to offset these costs.
  
• Despite current insulation from material tariff impacts, uncertainties beyond 2025 and changes in the supply chain dynamics could affect capital expenditure plans and profitability.
  
• The company's reliance on favorable weather for increased demand highlights a risk; unfavorable weather conditions in future periods could negatively impact revenue projections and operating results.

Valuation

• The analysts have a consensus price target of $75.722 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 $90.0, 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 $2.6 billion, earnings will come to $300.8 million, and it would be trading on a PE ratio of 21.4x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of $80.87, the analyst price target of $75.72 is 6.8% 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.