December 19, 2024
4 Gas Distribution Stocks to Watch From a Muted Industry #IndustryFinance

4 Gas Distribution Stocks to Watch From a Muted Industry #IndustryFinance

CashNews.co

Natural gas distribution companies offer services to transport natural gas from the region of production to millions of consumers across the United States. The utilities under the Zacks Utility Gas Distribution industry control miles of underground pipeline network to provide natural gas services to customers. The rising demand for clean, burning natural gas will create more opportunities for natural gas distribution companies.

Atmos Energy Corporation ATO, with its widespread transmission and distribution lines, interstate pipelines, and significant investments in infrastructure development projects, is poised to benefit as natural gas production volumes are expected to increase in 2024-2025. Steady investments and expanding infrastructure in crucial production regions should drive the performance of UGI Corporation UGI, MDU Resources Group MDU and NewJersey Resources NJR.

About the Industry

The shale revolution has substantially increased natural gas production. Its clean-burning nature has steadily boosted the demand for natural gas from all customer groups. Natural gas distribution pipelines are vital in delivering natural gas from intrastate and interstate transmission pipelines to consumers through small-diameter pipelines. The United States has 3,353 trillion cubic feet of natural gas, and a natural gas pipeline network of 2.6 million miles is utilized to distribute gas to customers. Major concerns for the industry are aging infrastructure and rising investment costs required to upgrade and maintain the vast network of pipelines due to the hike in interest rates. Competition from other clean energy sources can lower the demand for natural gas and, consequently, for pipelines.

3 Factors Shaping the Future of the Gas Distribution Industry

Interest Rate Decline is a Tailwind: To maintain, upgrade, and expand operations, utilities approach capital markets for loans. Multiple rate hikes by the Federal Reserve took the benchmark rate to the 5.25-5.50% range, adversely impacting utility operators. The U.S. Federal Reserve has finally lowered the benchmark rate by 50 basis points, bringing down rates to a range of 4.75-5%. The rates were lowered for the first time in four years. Capital-intensive domestic-focused utilities will benefit from the Fed’s decision to reduce interest rates. The drop in interest rates is a big positive for utility operators planning large investments in infrastructure upgrades.

Production Volumes of Gas to Drop in Near-Term: The short-term energy outlook released by the U.S. Energy Information Administration (EIA) indicates that domestic dry natural gas production in 2024 will be lower than 2023 levels due to a decline in production in the Gulf of Mexico region. EIA expects U.S. liquefied natural gas (LNG) export volumes in 2024 to remain in line with 2023 volumes and rise in 2025, with new export terminals coming online in late 2024. So, the gas pipelines will have to play a crucial role in transporting natural gas to these export terminals.

Fresh Investments Create Opportunities: The clean-burning nature and wide availability of natural gas across the United States are driving demand. At present, 187 million Americans use natural gas. The distribution network will continue to transport natural gas to all parts of the United States. With five new LNG export terminals being developed in the United States, there should be increased demand for natural gas pipeline services to transfer the gas from production areas to these terminals. Per EIA, once completed, the five new LNG projects will increase the combined export capacity by 9.7 Bcf/d by 2025. Per the American Gas Association report, one residential customer signs up for natural gas service every minute and 80 businesses add natural gas service each day. As production and demand for natural gas increase, more pipelines will be required to safely transfer the commodity to end-users. Per the report, natural gas utilities are investing $33 billion each year to increase the reliability of natural gas distribution and transmission systems, indicating the long-term growth potential of this space.

Zacks Industry Rank Indicates Bleak Prospects

The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates weak near-term prospects. The Zacks Utility Gas Distribution industry — a 14-stock group within the broader Zacks Utilities sector — currently carries a Zacks Industry Rank , which places it in the bottom 24% of the 250 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than two to one.

The industry’s positioning in the bottom 50% of the Zacks-ranked industries results from a negative earnings outlook for the constituent companies in aggregate. Since July 31, 2024, earnings estimates for 2024 have moved down by 0.28%.

Before we present a few Gas Distribution stocks that you may want to consider for your portfolio, let us look at the industry’s recent stock-market performance and valuation picture.

Gas Distribution Industry Lags S&P 500 and Sector

The Gas Distribution industry has underperformed the Zacks S&P 500 composite and its sector over the past year. The stocks in this industry have gained 24.5% in the said time frame compared with the Utility sector’s rise of 28.8%. The Zacks S&P 500 composite has gained 34.5% in the same time frame.

Price Performance (One Year)

Gas Distribution Industry Trading at a Discount

Since utility companies have a lot of debt on their balance sheets, the EV/EBITDA (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) ratio is commonly used to value them.

The industry is trading at a trailing 12-month EV/EBITDA of 11.45X compared with the S&P 500’s 19.4X and the sector’s 15.91X. Over the past five years, the industry has traded at a high of 14.3X and a low of 9.08X, with a median of 10.31X.

Utility Gas Industry vs. S&P 500 (Past Five Years)

Utility Gas Industry vs. Sector (Past Five Years)

Gas Distribution Stocks to Watch

Two of the four natural gas distribution stocks mentioned below currently carry a Zacks Rank (Buy), and the remaining two carry a Zacks Rank (Hold). You can see the complete list of today’s Zacks Rank (Strong Buy) stocks here.

Atmos Energy: This Dallas, TX-based company is engaged in the regulated natural gas distribution and storage business. Atmos Energy invested $2.8 billion in fiscal 2023 and plans to invest $3.1 billion in fiscal 2024 to strengthen its infrastructure further and efficiently serve more customers. Courtesy of its widespread pipeline, the company can transport more than 8 billion cubic feet of renewable natural gas annually. It continues to replace old pipelines and provide reliable services to its expanding customer base.

The current dividend yield is 2.3%, better than the Zacks S&P 500 Composite’s yield of 1.49%. The Zacks Consensus Estimate for ATO’s fiscal 2024 and 2025 earnings has moved up 0.9% and 0.6%, respectively, over the past 90 days. The stock currently carries a Zacks Rank .

Price and Consensus: ATO

UGI Corporation: This King of Prussia, PA-based company is engaged in the regulated natural gas distribution and storage business in the United States and internationally. It is likely to make a capital investment in the range of  $3.7- $4.1 billion during the fiscal 2024-2027 period to strengthen its operation and serve its customers efficiently.

The current dividend yield is 6.06%. The Zacks Consensus Estimate for UGI’s fiscal 2024 and 2025 earnings per share has moved up 0.3% and 0.9%, respectively, over the past 90 days. The stock currently carries a Zacks Rank .

Price and Consensus: UGI

MDU Resources: This Bismarck, ND-based company provides value-added natural resource products and related services to its customers. The company spun off its construction materials subsidiary, Knife River Corporation, and focuses solely on its energy delivery business. The company planned $2.76 billion in capital investments in the 2024-2028 period to strengthen its gas distribution operations further.

The current dividend yield is 1.8%. The Zacks Consensus Estimate for MDU’s 2024 and 2025 earnings per share has moved up 1.9% and 2.4%, respectively, in the past 90 days. The stock currently carries a Zacks Rank .

Price and Consensus: MDU

New Jersey Resources: This Wall, NJ-based company provides reliable energy services to its expanding customer base. Given its earnings growth opportunities and strong return on equity, NJR makes for a solid investment option in the utility sector. New Jersey Resources makes consistent investments to upgrade and maintain its existing infrastructure. The company expects capital expenditures to be in the range of $490-$580 million and $495-$675 million for fiscal 2024 and fiscal 2025, respectively.

The current dividend yield is 3.91%. The Zacks Consensus Estimate for NJR’s fiscal 2024 earnings has moved 0.3% higher over the past 90 days. The stock currently carries a Zacks Rank .

Price and Consensus: NJR

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Atmos Energy Corporation (ATO) : Free Stock Analysis Report

UGI Corporation (UGI) : Free Stock Analysis Report

MDU Resources Group, Inc. (MDU) : Free Stock Analysis Report

NewJersey Resources Corporation (NJR) : Free Stock Analysis Report

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