New Plants And Expansions Fuel Future Growth In Natural Gas Sector

Key Takeaways

• New natural gas processing plants and the NGL fractionator boost operational efficiency and volume, suggesting positive future revenue and net margin impacts.
  
• Long-term contracted projects under construction, including processing plants and export expansions, offer clear future earnings and cash flow growth visibility.
  
• High capital expenditures, debt leverage, and dependency on the Permian Basin, combined with regulatory risks, may pressure financial flexibility and revenue.

Catalysts

Provides midstream energy services to producers and consumers of natural gas, natural gas liquids (NGLs), crude oil, petrochemicals, and refined products.

• The significant increase in gross operating margin for the NGL Pipeline and Services segment (19% compared to the previous year), primarily due to new natural gas processing plants in the Permian and the 12th NGL fractionator, indicates growing operational efficiency and volume growth, positively impacting future revenue and net margins.
  
• The 23% increase in gross operating margin in the Natural Gas Pipelines and Services segment, driven by higher transportation revenues and marketing margins, suggests a strong demand outlook and operational leverage, contributing to enhanced revenue streams.
  
• The successful completion of the PDH 1 plant turnaround and the anticipated success of PDH 2's turnaround, leading to operational efficiencies and higher production volumes, are expected to reduce operational headwinds, potentially improving net income and earnings.
  
• The closing of the diluent open season with 100,000 barrels a day of new contracted commitments underscores the company's ability to secure long-term revenue, enhancing financial stability and growth prospects.
  
• The $6.7 billion in projects under construction, backed by long-term contracts, including new processing plants and export expansions, provide clear visibility into future earnings and cash flow growth, indicating a potential upside for the stock due to expected revenue and earnings growth.

Assumptions

• Analysts are assuming Enterprise Products Partners's revenue will grow by 3.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.4% today to 10.9% in 3 years time.
• Analysts expect earnings to reach $6.5 billion (and earnings per share of $2.98) by about August 2027, up from $5.7 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 13.9x on those 2027 earnings, up from 11.1x today. This future PE is greater than the current PE for the US Oil and Gas industry at 10.4x.
• Analysts expect the number of shares outstanding to decline by 0.07% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 8.07%, as per the Simply Wall St company report.

Risks

• The sustained high level of capital expenditures for growth and sustaining projects through 2025 could strain cash flows and pressure financial flexibility, potentially impacting net margins.
  
• Volatility and potential decreases in oil and natural gas prices could reduce demand for midstream services, negatively affecting revenue.
  
• The high degree of leverage, with total debt principal outstanding at approximately $30.6 billion, increases financial risk, potentially impacting earnings through higher interest expenses.
  
• Dependency on the Permian Basin for growth, despite current positive trends, introduces geographical concentration risks that could affect revenue if the region experiences a downturn.
  
• Regulatory and geopolitical risks, including tariffs and shifts in energy policies, could impact export demand, particularly to key markets like China, potentially reducing revenue.

Valuation

• The analysts have a consensus price target of $33.39 for Enterprise Products 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 $37.0, and the most bearish reporting a price target of just $30.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $60.2 billion, earnings will come to $6.5 billion, and it would be trading on a PE ratio of 13.9x, assuming you use a discount rate of 8.1%.
  
• Given the current share price of $29.17, the analyst's price target of $33.39 is 12.6% 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.