DT Midstream Inc’s share price (NYSE:DTM) has been volatile over the past few months, falling more than 6% last year after a rapid rise in 2022 Improvement in natural gas prices. However, I think DTM still exhibits a sense of being overvalued, as FWD trades at a P/E ratio of over 14, which represents a premium of approximately 40% to the rest of the industry. In my opinion, this premium only applies if the company is growing at double-digit year-over-year growth rates. For DTM, I don’t think this is the case.
But it should be said that DTM currently has a very stable dividend yield of over 5%.I think this is worth participating and will rate The company holds accordingly. I think the payout ratio is high, but not outrageously high. I think long-term demand for natural gas is enough to drive DTM’s top and bottom lines higher for at least the next decade.
DTM is a leading integrated natural gas service provider in the United States. The company’s operations are divided into two key segments: pipelines and collection. Across these segments, DTM excels in the development, ownership and operation of a broad portfolio of critical infrastructure. This infrastructure includes interstate and intrastate pipelines, storage systems, lateral pipelines, gathering systems, associated processing facilities, and compression and surface facilities. DTM plays a vital role in facilitating the efficient transportation and management of natural gas resources across the national energy landscape.
DTM’s asset base covers a wide range of areas and has been a leading factor in business growth. These pipelines are of high quality and participate in attractive markets. The company also currently has 94 Bcf of robust natural gas storage capacity and 600 miles of intrastate and lateral pipelines.
The company remains poised to deliver strong growth for investors as they reiterated their growth capital outlook from 2023 to 2027. New greenfield investments have committed capital levels of $800 million, with an additional $15 million to be invested in Louisiana CCS by 2023. These investments are funded by free cash flow remaining after dividends are paid.
Dividends are expected to continue to improve over the next few years, and I think rising long-term natural gas prices will be the main driver behind this. DTM has made it clear that they intend to increase shareholder returns while expanding rapidly. I think the asset base DTM owns is a further argument for this growth. The Marcellus and Utica Basins are often overlooked in mainstream financial discussions, and it is important to note that these areas represent two of the richest hydrocarbon basins in the United States, particularly in terms of natural gas resources. DTM is unique in its unique role as one of a select group of midstream companies serving producers in these regions. This strategic positioning puts the company well-positioned to capitalize on any potential surge in natural gas demand. DTM’s ability to facilitate the transportation and distribution of natural gas from these rich basins underscores its important role in supporting the nation’s energy landscape and its potential for growth in the evolving energy industry.
DTM’s operating results and profitability are susceptible to changes in laws and regulations governing the energy industry. Complying with safety, environmental and various compliance requirements can pose significant challenges for companies. These regulatory changes may require costly adjustments to DTM operations and may impact their profits. In addition, changing regulations may affect the Company’s ability to pursue certain projects or expand into new markets, which may affect its growth prospects and profitability.
Operational risks pose significant threats to DTM, including potential production delays, reputational damage and financial losses. These risks can manifest in many forms, including equipment failure, supply shortages or unforeseen accidents. Any of these events could disrupt a company’s operations, cause costly setbacks, and negatively impact its industry standing. Beyond that, however, there is certainly the obvious risk of commodity price volatility that looms large, which could impact the company’s earnings results from quarter to quarter to some degree.
Natural gas prices have been falling since last year, and unlike oil, it doesn’t seem to have fully recovered, which I think is a little concerning. Unfortunately, if prices continue to be suppressed, DTM’s gains are likely to be suppressed as well. But I think the long-term outlook and the recognition that we need natural gas and good infrastructure to power our society are the big trends that are benefiting the company a lot right now.
In terms of DTM’s assets, currently the equivalent of $95 million in cash, compared to the over $3 billion of long-term debt held by DTM, I think the situation is difficult. The business’s interest expense has been climbing steadily as the debt profile has increased, while interest rates have been the same. TTM expenses are $146 million, which I think is a bit concerning and does open up the possibility of meeting debt at a sluggish dividend growth rate. But as we can see on the balance sheet, DTM continues to be very positive about the market, with real estate investments having grown by over $200 million since December 31, 2022.
DTM’s current dividend yield is very stable at over 5%, and with natural gas spot prices expected to rise, the likelihood of a dividend increase increases as well. Based on the P/E ratio, I think DTM is still overpriced. I’m more interested in ap/e around 9 – 10. However, I realize the dividend is good for capture, so rate DTM a Hold.