On Friday, Citi initiated coverage on Archrock (NYSE:AROC) stock, a provider of natural gas compression services, with a Buy rating and a price target of $24.00.
The firm projects a peer-leading two-year EBITDA compound annual growth rate (CAGR) of approximately 15%. This optimistic outlook is based on several growth factors anticipated for the company.
The coverage initiation is supported by expectations of organic growth within Archrock's existing business. With around two-thirds of the company's fleet operating in the Permian and Eagle Ford (NYSE:F) regions, Archrock is poised to benefit from the increasing demand for natural gas, especially with the expansion of liquefied natural gas (LNG) capacity.
Citi's analysis suggests that Archrock is likely to organically add more than 300,000 horsepower (HP (NYSE:HPQ)) to its operations over the next two years, expanding the current fleet by nearly 10%. This expansion is expected to be supported by a steady capital expenditure of approximately $200 million annually.
In addition to organic fleet growth, Archrock is anticipated to gain from pricing advantages in a market that is structurally tight. Citi forecasts low to mid-single-digit growth in this area over the coming two years, which should further bolster the company's financial performance.
The recent acquisition of TOPS by Archrock is also highlighted as a significant contributor to the company's growth. This move is expected to add around $140 million of EBITDA (before synergies) and increase the fleet by over 500,000 HP. Moreover, it provides Archrock with exposure to the expanding electric horsepower market, marking a strategic step for the company in diversifying its operations.
In other recent news, Archrock has been the focus of positive analyst coverage, completed a significant acquisition, and reported strong financial results. Investment firms Evercore ISI and JPMorgan have both initiated coverage on Archrock, rating the stock as outperform and overweight respectively, reflecting the company's strong position in the gas compression market and growth potential amid rising natural gas demand.
Archrock recently finalized the acquisition of Total Operations and Production Services (TOPS), expanding its natural gas compression services in the Permian Basin. This strategic move is expected to contribute significantly to Archrock's EBITDA growth and further solidify its competitive edge.
Financially, Archrock reported a substantial increase in net income, reaching $34 million, up from $25 million in the same quarter of the previous year. The company's adjusted EBITDA also rose by 15% to $130 million. To fund its expansion strategy, Archrock priced an upsized private offering of $700 million in senior notes with a 6.625% interest rate, maturing in 2032.
These are the recent developments that have been shaping Archrock's business landscape. As these developments unfold, they are expected to influence investor sentiment and market activity related to Archrock shares.
InvestingPro Insights
Archrock's (NYSE:AROC) current market dynamics and financial metrics, as reflected in real-time data from InvestingPro, underpin the positive outlook presented by Citi. With a market capitalization of $3.54 billion and a trailing twelve-month revenue growth of 15.61%, the company demonstrates robust financial health and growth potential. The P/E ratio stands at 22.76, which, when paired with a PEG ratio of just 0.24, signals that the stock is trading at a low price relative to near-term earnings growth potential.
Investors may also find comfort in the company's consistent dividend payments over the past 11 years, with a current dividend yield of 3.27%. This consistent return to shareholders is complemented by a strong one-year price total return of 58.38%, reflecting investor confidence and market performance.
For those seeking deeper analysis, InvestingPro offers additional insights into Archrock, including a fair value estimation and more detailed financial metrics. With 7 more InvestingPro Tips available, including the company's liquidity position and profitability predictions, investors can access a comprehensive view of Archrock's investment profile at InvestingPro.
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