DTM - DT Midstream: Asset Optimization Fostering Growth

2023-05-29 07:35:32 ET

Summary

• DT Midstream pays a solid dividend and has ample room to execute FCF plans.
• DTM stock has outperformed the S&P 500 when adjusting for dividends over the last 2 years.
• DT's optimization of assets has expanded margins and improved efficiencies.
• Assuming my DCF figures, DT Midstream is currently overvalued, resulting in a hold rating.

DT Midstream, Inc. ( DTM ) has recently demonstrated strong growth since its separation from DTE Energy. I believe that the stock is a hold due to its solid dividend, asset optimization, and overvaluation assuming my DCF figures.

Business Overview

DT Midstream, Inc. provides integrated natural gas services in the United States. The company operates through two segments, Pipeline and Gathering. It develops, owns, and operates an integrated portfolio of interstate pipelines, intrastate pipelines, storage systems, lateral pipelines, gathering systems, related treatment plants, and compression and surface facilities.

The company engages in the transportation and storage of natural gas for intermediate and end-user customers; and collecting natural gas from points at or near customers' wells for delivery to plants for processing, to gathering pipelines for gathering, or to pipelines for transportation, as well as offers compression, dehydration, gas treatment, water impoundment, water storage, water transportation, and sand mining services. It serves natural gas producers, local distribution companies, electric power generators, industrials, and national marketers.

DT has a market capitalization of $4.47 billion and a ROIC of 5%, indicating steady growth. Its stock price has ranged from a high of $61.12 to a low of $45.10, with the current price at $46.15. With a P/E ratio of 12.11, DTE's stock is trading at a relatively low valuation compared to its peers.

DT also offers a robust dividend of 5.66%, reflecting a secure payout ratio of 68.64%. This allows the company to provide reliable income to shareholders while maintaining sufficient free cash flow to invest in and enhance its core business operations.

With Q1 2023 results falling short of expectations both in terms of earnings per share (9.93% miss at $0.93 versus the expected $0.84) and revenue (9.09% miss at $242 million versus the expected $220 billion), DT Midstream is experiencing underperformance amidst moderate economic challenges. This highlights the importance of implementing a strategic shift to enhance revenue stability and establish consistent cash flows. However, I remain optimistic about DT Midstream's ability to adapt and improve, enabling the company to recover from this setback and maintain long-term growth prospects.

Outperforming the Broader Market

DT Midstream has demonstrated superior performance compared to the S&P 500 over the previous two years when accounting for dividends. This showcases the company's adeptness in efficiently utilizing free cash flow to not only provide attractive returns to shareholders but also sustain its growth trajectory.

Asset Optimization Fostering Long-Term Growth

The goal of DT Midstream's asset optimization approach is to increase the productivity and financial success of its infrastructure for gathering, processing, and transporting natural gas. This strategy entails a number of efforts targeted at enhancing the performance and exploitation of its resources.

The application of sophisticated monitoring and control technologies throughout its infrastructure is one example of DT Midstream's asset optimization strategy. The business may collect accurate and current information on gas circulates, stresses, and various other operating factors by utilizing cutting-edge technology, including remote sensors, statistical analysis, and continuous monitoring tools.

With the use of this information, DT Midstream is able to pinpoint any gaps in its network for gathering and processing data. For instance, the business may spot regions where gas flow rates are subpar or where there are limitations on capacity restrictions in particular infrastructure components. With this knowledge, DT Midstream may make proactive decisions to improve the performance of its assets.

DT Midstream may launch initiatives to increase the capacity of its data collection and processing facilities in response to observed bottlenecks, or it may change the flow patterns to boost operational effectiveness. This can entail adding more compression devices, building new pipelines, or improving the infrastructure that already exists.

In addition, DT Midstream can employ the data collected to pinpoint areas for process improvement. For instance, the business can find potential energy-saving solutions by looking at operational data, including improving compressors operation schedules or installing more effective systems for heat recovery in its processing facilities.

DT Midstream can improve infrastructure performance by continuously monitoring, analyzing, and optimizing its assets in order to boost throughput, decrease downtime, and improve overall performance. This allows the business to provide its clients with dependable and affordable natural gas transport and treatment services while optimizing its return on its asset investments.

I believe DT Midstream can successfully optimize its asset portfolio, improve operational efficiency, and keep its edge in the energy infrastructure sector by embracing cutting-edge technologies and data-driven insights. As a result, operating costs will be reduced, increasing profits, and DT will be able to grow thanks to better cash flow.

Analyst Consensus

According to analyst consensus, DT Midstream is rated as a "buy". The stock shows promising potential for returns, as indicated by the average price target of $56.75, representing a significant upside of 22.97%.

Valuation

Prior to establishing my assumptions and conducting a discounted cash flow analysis, I will compute the Cost of Equity and Weighted Average Cost of Capital for DT Midstream using the Capital Asset Pricing Model. By considering a risk-free rate of 3.81%, I determined that the Cost of Equity amounted to 8.82%, as illustrated below.

Based on the aforementioned Cost of Equity value, I derived the Weighted Average Cost of Capital to be 6.86%, as indicated below. This WACC figure is lower than the industry average of 9.11% , suggesting that DT Midstream may have a relatively lower cost of capital compared to its peers.

Using an Equity Model DCF analysis based on net income, I have determined that DT Midstream is currently overvalued by 7%, indicating a fair value of approximately $43.06. This valuation was derived by applying a discount rate of 8.82% for a 5-year time frame. Furthermore, I projected a mid-single-digit revenue growth rate beyond 2023 to assess the company's future performance.

Risks

Regulatory Environment: The operations and profitability of DT Midstream may be impacted by changes in regulatory laws and regulations pertaining to the energy sector. Observing safety, environmental, and other requirements can be difficult.

Operational Risks: Production delays, harm to DT Midstream's reputation, or financial losses could result from operational risks such as equipment breakdowns, supply shortages, or accidents.

Conclusion

In conclusion, I recommend holding on to DT Midstream due to its attractive dividend, successful asset optimization leading to margin expansion, and considering its overvaluation based on my DCF analysis.

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