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On Jul 3, 2013, we retained our Underperform recommendation on energy services holding company AGL Resources Inc. (GAS - Analyst Report). Our investment thesis is supported by a Zacks Rank #4 (Sell).

Why the Reiteration?

We expect shareholder sentiment towards the company to remain lukewarm, considering its investment in higher-risk unregulated operations, ongoing regulatory uncertainties and the challenging economic environment. AGL Resources’ earnings are likely to suffer in 2013 due to a less-than-favorable outlook at its wholesale segment. Additionally, inclusion of the shipping operations (post Nicor acquisition) has left AGL Resources with a weak business, thereby heightening its risk profile.

Causes for Concern

The outlook for AGL Resources’ wholesale segment continues to be less than favorable. We believe that margins in this unit will be under pressure, based on narrow spreads for transportation and storage.

During the next few quarters, AGL Resources’ shipping segment results may also remain weak. The absence of a strong economic recovery in the U.S. continues to have a negative impact on tourism and the economies in Tropical Shipping’s service territories (particularly in the Bahamas and the Caribbean).

Natural gas distribution is usually a temperature-sensitive business with about half of all deliveries used for space heating. Usually, almost 75% of the deliveries and sales occur during the six-month period of October through March. Consequently, milder-than-normal weather conditions in the future could adversely effect AGL Resources’ operating results, cash flow and financial condition.

Stocks That Warrant a Look

While we expect AGL Resources to perform below its peers and industry levels in the coming months and see little reason for investors to own the stock, one can look at Atmos Energy Corp. (ATO - Snapshot Report), National Fuel Gas Co. (NFG - Snapshot Report) and Questar Corp. (STR - Analyst Report) as good buying opportunities. These natural gas distributors – sporting a Zacks Rank #2 (Buy) – have solid secular growth stories with potential to rise from current levels.
 

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