Perito Moreno Expansion And Vaca Muerta Midstream Capacity Will Drive Long Term Earnings Quality

Catalysts

About Transportadora de Gas del Sur

Transportadora de Gas del Sur operates natural gas transportation, midstream and natural gas liquids processing and export infrastructure in Argentina.

What are the underlying business or industry changes driving this perspective?

• Execution of the 14 million cubic meters per day Perito Moreno expansion, with dollar-denominated, unregulated tariffs over a 15-year period, is set to structurally lift transportation revenue and reduce earnings volatility.
• Additional 12 million cubic meters per day capacity between Salliqueló and Greater Buenos Aires should deepen integration with growing domestic gas demand, supporting higher regulated volumes and improved long term margins as inflation catch-up in tariffs materializes.
• Rising supply of rich gas from Vaca Muerta and associated production, which has already driven a sharp increase in liquids output and exports, can sustain elevated utilization of processing assets and underpin continued EBITDA and net income growth.
• Deregulation of domestic butane prices, allowing sales at export parity, signals a more market-oriented pricing framework that can support structurally higher unit prices, improving segment margins and cash generation even under moderate volume scenarios.
• Growing midstream services in Vaca Muerta, with increasing transported and conditioned volumes and potential participation in future LNG-linked pipeline projects, can expand fee-based revenue streams and diversify earnings beyond the regulated business.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Transportadora de Gas del Sur's revenue will grow by 22.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 26.8% today to 29.6% in 3 years time.
• Analysts expect earnings to reach ARS 714.6 billion (and earnings per share of ARS 23.48) by about December 2028, up from ARS 352.0 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ARS824.1 billion in earnings, and the most bearish expecting ARS597.3 billion.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 26.4x on those 2028 earnings, up from 20.3x today. This future PE is greater than the current PE for the US Oil and Gas industry at 15.8x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 24.22%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The company is committing approximately $780 million to large scale transportation expansions at Perito Moreno and between Salliqueló and Greater Buenos Aires. Any construction delays, cost overruns, or inability to secure remaining financing or RIGI tax benefits could depress returns on invested capital and weigh on earnings growth over the long term.
• Despite inflationary conditions, recent tariff adjustments in the regulated transportation segment were not sufficient to offset inflation and rising operating expenses. This indicates a structural risk that future regulatory lag or adverse tariff policy could continue to erode real transportation revenues and compress net margins.
• Current strength in the liquids business is heavily driven by exceptionally rich gas from Vaca Muerta and deregulated domestic butane prices. Any sustained decline in international liquids prices, a reversal of price deregulation, or a weakening in Vaca Muerta production growth could materially reduce segment EBITDA and overall net income.
• The balance sheet and cash flows are increasingly exposed to macro and currency volatility in Argentina, with higher foreign exchange losses already impacting financial results. Further peso depreciation, shifts in monetary policy, or higher local interest rates could diminish real cash generation and lower reported earnings in constant pesos.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of ARS13100.0 for Transportadora de Gas del Sur based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be ARS2414.5 billion, earnings will come to ARS714.6 billion, and it would be trading on a PE ratio of 26.4x, assuming you use a discount rate of 24.2%.
  
• Given the current share price of ARS9505.0, the analyst price target of ARS13100.0 is 27.4% 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.