For Immediate Release
Chicago, IL – February 12, 2024 – Today, Zacks Equity Research discusses Sempra Energy SRE, Atmos Energy Corp. ATO, UGI Corp. UGI and MDU Resources Group MDU.
Industry: Gas Utility
Link: https://www.zacks.com/commentary/2224129/4-gas-distribution-stocks-to-watch-in-a-challenging-industry
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.
Sempra Energy, with its widespread transmission and distribution lines and interstate pipelines and significant investments in infrastructure development projects, is poised to benefit as natural gas production volumes are expected to increase in the 2024-2025 time frame. Steady investments and expanding infrastructure in crucial production regions should drive the performance of Atmos Energy Corp., UGI Corp. and MDU Resources Group.
About the Industry
The shale revolution has substantially increased natural gas production. Its clean-burning nature steadily boosts 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 natural gas network in the United States has nearly 2.3 million miles of underground distribution pipelines.
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 demand for natural gas and, consequently, for pipelines.
Factors Shaping the Future of the Gas Distribution Industry
Production and Export Volumes of Gas to Increase: The short-term energy outlook released by the U.S. Energy Information Administration (EIA) indicates that domestic dry natural gas production will grow to 105 billion cubic feet per day (Bcf/d) in February 2024 and continue to remain at that level in 2024 as weather-related disruption decreases. The EIA expects dry natural gas production to average 104 Bcf/d through 2024 and will increase to 106 Bcf/d in 2025.
The EIA also forecasts gas consumption to increase 5% in first-quarter 2024 compared with the year-ago quarter level. Export volumes are expected to increase in 2024 and 2025, providing much relief to natural gas transporters. The EIA expects U.S. gross liquefied natural gas (LNG) export volumes to increase nearly 2.2% year over year to 12.09 Bcf/d in 2024, and exports are expected to increase 19.4% to 14.43 Bcf/d in 2025. This indicates the need for more pipelines to send LNG to export terminals.
Fresh Investments Create Demand: 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 the EIA, once completed, the five new LNG projects will increase the combined export capacity by 9.7 Bcf/d by 2025. Per Playbook.AGA.org, 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.
Possibility of Interest Rate Decline is a Tailwind: Utilities, in order to maintain, upgrade and expand operations, approach capital markets for loans. The utilities have been enjoying near-zero interest rates for the past few years. However, multiple rate hikes by the Federal Reserve took the benchmark rate to the 5.25-5.50% range, which impacted the utility operators.
However, in its last four meetings, the Fed did not increase the benchmark rate, and there is a possibility of rate cuts in 2024. The likely drop in interest rates in 2024 would be a positive for utility operators who are planning large investments in infrastructure upgrades and the addition of renewable sources of energy to produce electricity.
Zacks Industry Rank Indicates Weak Prospects
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates dull 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 #169, which places it in the bottom 32% 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 2 to 1.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries results from a positive earnings outlook for the constituent companies in aggregate. Earnings estimates for 2024 have gone down by 19% since Jul 31, 2023, to $4.11 per share.
Before we present a few Gas Distribution stocks that you may want to consider for your portfolio, let’s look at the industry’s recent stock-market performance and valuation picture.
Industry Lags Sector and S&P 500
The Gas Distribution industry has underperformed the Zacks S&P 500 composite and the sector over the past year. The stocks in this industry have collectively lost 13.8% in the same time frame compared with the Utility sector’s fall of 7.7%. The Zacks S&P 500 composite has gained 23.4% in the same time frame.
Gas Distribution Industry's Current Valuation
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 9.28X compared with the S&P 500’s 14.52X and the sector’s 15.59X. Over the past five years, the industry traded at a high of 14.3X, a low of 9.05X, and a median of 10.44X.
4 Gas Distribution Stocks to Keep a Close Watch On
Three out of the four natural gas distribution stocks mentioned currently have a Zacks Rank #2 (Buy), and the remaining one carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Sempra Energy: This San Diego, CA-based company efficiently serves a population of 21.1 million. In the 2023-2026 period, the company aims to invest $40 billion to strengthen its existing operations. The company continues to gain from economic improvement in its service territories, resulting in new customer additions and growth in demand.
The Zacks Consensus Estimate for SRE’s 2024 earnings has moved 1.1% higher to $4.59 per share over the past 90 days. The stock currently carries a Zacks Rank #2.
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. The company is likely to make a capital investment of more than $2 billion during the 2024- 2027 time period to strengthen its operation and serve its customers efficiently.
The Zacks Consensus Estimate for UGI’s fiscal 2024 earnings has remained unchanged in the past 60 days. The stock currently carries a Zacks Rank #2.
MDU Resources Group: 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 has planned $609 million in capital investments in 2024 to strengthen its gas distribution operations further. MDU continues to add new customers to its operating territories, which is boosting demand for its services. For the 2024-2028 period, it plans to invest $2.76 billion. The Zacks Consensus Estimate for MDU’s 2024 earnings has remained unchanged in the past seven days. The stock currently carries a Zacks Rank #2.
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 $2.9 billion in fiscal 2024 to strengthen its infrastructure further and serve more customers more efficiently.
The company continues to replace old pipelines and provide reliable services to its expanding customer base. The Zacks Consensus Estimate for ATO’s fiscal 2024 earnings has moved 1.1% higher to $6.57 per share over the past 90 days. The stock currently carries a Zacks Rank #3.
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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
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Sempra Energy (SRE) : Free Stock Analysis Report
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