Investors seeking income and growth in the energy sector may want to take a closer look at DT Midstream (DTM), a midstream energy company that has caught attention after its recent strategic maneuver. The company recently sealed a massive $1.2 billion pipeline acquisition deal, underscoring its aggressive growth strategy and positioning it to capitalize on increasing energy demand.
Despite the stock’s overall “Hold” rating, Citi has expressed a bullish outlook on the deal, highlighting the potential for solid value creation. Moreover, DTM offers a dividend yield of about 2.8%, making it an appealing choice for income-focused investors.
In this article, we’ll dive deeper into DT Midstream’s fundamentals, analyzing its recent acquisition, financials, valuation, dividend potential, and growth outlook. Whether you’re an income seeker or a growth-oriented investor, this stock could be worth a closer look.
About DT Midstream Stock
With a market cap of $10.5 billion, DT Midstream (DTM) owns, operates, and develops natural gas (NGF25) interstate and intrastate pipelines, storage and gathering systems, as well as compression, treatment, and surface facilities. It transports clean natural gas for utilities, power plants, marketers, large industrial customers, and energy producers throughout the Southern, Northeastern, and Midwestern United States and Canada.
DTM also provides a complete range of wellhead-to-market services, including natural gas transportation, storage, and gathering. The company was incorporated in July 2021 following its official separation from diversified utility company DTE Energy (DTE).
Shares of the natural gas pipeline and gathering company have rallied 94.8% on a year-to-date basis, significantly outperforming the broader market.
Citi Gets More Bullish on DTM Stock After $1.2B Pipeline Deal
On Nov. 19, DT Midstream announced that it had reached an agreement to acquire a portfolio of three FERC-regulated natural gas transmission pipelines from ONEOK (OKE) for $1.2 billion in cash. Under the terms of the deal, DTM will acquire 100% operating ownership in Guardian Pipeline, Midwestern Gas Transmission, and Viking Gas Transmission. Together, these pipelines have a total capacity of over 3.7 billion cubic feet per day and extend approximately 1,300 miles across seven states in the Midwest market region. It should also be noted that the transaction was completed at a reasonable EV to EBITDA multiple of 10.5x, based on projections for 2025.
DTM noted that the acquisition aligns directly with its strategy of “owning natural gas assets connecting premier supply basins with key demand centers and market regions, and with revenues supported by take-or-pay contracts with creditworthy and diverse customers.”
Management anticipates the deal will boost its pipeline segment to 70% of adjusted EBITDA in 2025 and expand its backlog of organic growth projects. Overall, this acquisition will strengthen its network and strategic positioning in the Midwest. Furthermore, management forecasts substantial growth fueled by increasing natural gas demand, especially from data centers and the phasing out of coal-fired power plants. With that, the company’s assets are well-positioned to capitalize on long-term demand growth.
Citi analyst Spiro Dounis expressed enthusiasm about the pipeline deal. He upgraded DT Midstream to “Buy” from “Neutral,” and raised the stock's price target to $115 from $90, noting the deal’s potential to significantly improve the company’s profile. Dounis said that the acquisition sets the company apart from other natural gas entities by increasing the Pipeline segment to 70% of the overall business - a premium segment whose contribution is now substantially higher than that of its peers.
With DT Midstream’s market capitalization recently exceeding $10 billion, Dounis anticipates that the company will now draw interest from a broader range of investors, including those from international markets. The analyst also believes the acquisition will back DTM’s top-quartile dividend growth rate, and sees the deal as a blueprint for further expanding the company’s size.
“At current 11.5x 2026 EBITDA, DTM still trades at a ~0.5x discount to peers, which creates a compelling value opportunity,” Dounis writes.
How Did DT Midstream Perform in Q3?
DT Midstream reported its financial results for the third quarter of fiscal 2024 on Oct. 29. The company’s operating revenues grew 1.6% quarter-over-quarter to 248 million. Notably, the company generates revenue from two segments: Pipeline and Gathering. The growth in the third quarter was primarily fueled by a 2.8% quarter-over-quarter rise in operating revenues from the Pipeline segment, attributed to new contracts and expansion of the Haynesville System. Operating revenues from the Gathering segment remained largely unchanged compared to the previous quarter.
It's also worth mentioning that about 90% of its revenues are derived from take-or-pay contracts, and 85% of its customers hold an investment-grade credit rating. This indicates that DTM generates high-quality cash flows from customers with strong credit ratings.
DT Midstream’s adjusted EBITDA came in at $241 million, marking a $7 million decrease from the previous quarter. The Pipeline segment’s results exceeded the second quarter by $3 million, reflecting a full quarter’s contribution from the LEAP Phase 3 expansion, which commenced service in June. The Gathering segment results were a drag, decreasing by $10 million compared to the second quarter. Operationally, total gathering volumes from both the Haynesville and Northeast regions averaged about 2.9 billion cubic feet per day, with management projecting a sequential increase in gathering volumes in Q4 as well as incremental maintenance expenses.
Notably, the company derives approximately 65% of its adjusted EBITDA from pipelines, with the remaining 35% coming from gathering assets. Together, these two segments provide DT Midstream with an exceptional integrated wellhead-to-market service that has no direct exposure to commodity prices. Its adjusted earnings per share were $0.90, down from $0.98 in Q2 and slightly below the expected $0.96.
The company maintains a healthy balance sheet, ending the quarter with $77 million in cash and no debt maturities for the next five years. DTM further optimized its balance sheet during the quarter by issuing $800 million in new project-level debt at Millennium Pipeline and using the proceeds to fully repay the $400 million balance on its term loan.
“We continue our strong performance in 2024,” said David Slater, President and CEO. “And we have made great progress advancing new opportunities which will support our future growth.”
Slater also provided several important business updates. First, the company made a final investment decision on the Phase 4 expansion of the LEAP system, which will increase the system’s capacity to 2.1 billion cubic feet per day by the first half of 2026. Second, the company upsized its previously announced project that connects to the Mountain Valley Pipeline on the Stonewall system. This expansion will boost the capacity of this strategic Appalachian base and interconnect, offering the company’s customers additional access to the growing Mid-Atlantic markets. Finally, Fitch Ratings upgraded DT Midstream to investment grade, a strategic goal the company has pursued since its spin-off in 2021.
By progressing projects from its organic project backlog and capitalizing on the scale of its existing integrated asset platforms, DT Midstream is well-positioned for sustained growth in 2025 and beyond. Meanwhile, buoyed by strong performance year-to-date, management increased the lower end of the 2024 adjusted EBITDA guidance to a range of $950 million to $980 million, up from the previous range of $930 million to $980 million.
Analysts tracking DT Midstream anticipate its EPS to remain mostly unchanged year-over-year at $3.96 in fiscal 2024. At the same time, Wall Street expects DTM’s full-year revenue to be $978.95 million, up 6.18% year-over-year.
DTM Stock Valuation and Dividend Yield
On Oct. 29, DT Midstream declared a quarterly dividend of $0.735 per share, in line with the previous, payable to its shareholders on Jan. 15. Its annualized dividend of $2.94 per share translates to a moderate dividend yield of 2.78%.
However, it is worth noting that the dividend has grown at an average annual rate of 7% over the past three years. Moreover, management anticipates sustaining an average annual dividend growth rate of 5-7% over the long term.
In terms of valuation, the company’s forward EV/EBITDA ratio is 13.75x, considerably above the sector median of 6.35x. Also, its Price/Cash Flow (TTM) ratio stands at 13.48x, well above the sector median of 5.67x. Although DTM presents compelling long-term value, the stock definitely looks expensive at current levels.
What Do Analysts Expect For DTM Stock?
Despite Citi’s optimism, the broader analyst community takes a more cautious stance on DTM stock, assigning it a consensus rating of “Hold.” Out of the 11 analysts covering the stock, three recommend a “Strong Buy,” one suggests a “Moderate Buy,” five advise a “Hold,” one recommends a “Moderate Sell,” and one gives a “Strong Sell” rating.
Notably, the stock trades at a premium to its average price target of $90.90. However, the Street-high target price of $115.00, set by Citi, indicates a moderate upside potential of 7.8% from current levels.
