The Zacks Utility Gas Distribution industry comprises companies that offer services to transport natural gas from the region of production to end users. Gas pipelines play a crucial role in delivering natural gas from intrastate and interstate transmission pipelines to consumers through small diameter distribution pipelines.
Notably, the natural gas network in the United States has nearly 3 million miles of pipeline. Increasing consumption of natural gas in the United States and internationally is driving demand for distribution pipelines. People are staying at home mostly to follow social distancing guidelines and avoid exposure to the novel coronavirus pandemic. The distribution pipelines spread across the United States will play a major role in ensuring the supply of natural gas to millions of households in the country.
Let us take a look at the industry’s three major themes:
- Per the U.S. Energy Information Administration’s (EIA) recent short-term energy outlook release, domestic natural gas consumption for 2020 will likely be 82.4 billion cubic feet per day (Bcf/d), down 3.0% from 2019. The largest decline in consumption will likely come from the industrial space due to lower manufacturing activity owing to the pandemic. This decline is forecast at 4.34% from 2019 to 22.0 Bcf/d. Lesser total U.S. consumption will also reflect lower heating demand in early 2020. For the full year, the EIA projected residential and commercial demand of 12.8 Bcf/d (down 0.9 Bcf/d from 2019) and 8.8 Bcf/d (down 0.8 Bcf/d from 2019), respectively, on average.
- The existing U.S. natural gas distribution pipelines are aging. Leakage or breakage in these old cast iron and bare steel pipelines may result in disruption of services. At present, natural gas distribution utilities provide services to over 75 million residential and 5 million commercial customers in the United States. To lower the possibility of interruption in services, the Department of Energy announced $38.5 million funding for a program that will promote the development of new technologies to strengthen cast iron and bare steel natural gas distribution pipes by creating a new pipe inside the old pipe. The Rapid Encapsulation of Pipelines Avoiding Intensive Replacement or REPAIR program will ensure minimum extension of the service life of distribution pipelines by 50 years and lower the replacement cost of old pipelines by nearly 10 to 20 times per mile. At present, pipe excavation and replacement costs can up to $10 million per mile. The current near-zero interest rate will assist utilities in sourcing funds for their capital projects at a cheaper rate.
- Natural gas is preferred to other fossil fuel sources due to its clean burning nature and abundance in the United States. To cater to increasing demand, more natural gas pipelines projects have been planned and are presently under construction. While these were scheduled to be completed in 2020, the COVID-19 pandemic has jeopardized construction schedules with companies are trying to preserve liquidity and delay capital projects. Per the EIA release, dry natural gas production in the United States in 2020 will average 88.7 billion cubic feet per day (Bcf/d), marking a 3.8% decrease from 2019. EIA expects that U.S. LNG exports will decline through the end of the summer 2020 as a result of reduced global demand for natural gas.
Zacks Industry Rank Indicates Bleak Prospects
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates weak near-term prospects.
The Zacks Utility Gas Distribution industry — a 16-stock group within the broader Zacks Utilities sector — currently carries a Zacks Industry Rank #198, which places it in the bottom 21% of the 253 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms 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 is a result of negative earnings outlook for the constituent companies in aggregate. From the end of first-quarter 2020, estimates for 2020 are down by 6.4%.
Before we present a few Gas Distribution stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Lags S&P 500 & Sector
The Gas Distribution industry has underperformed the Zacks S&P 500 composite and its own sector over the past year. The stocks in this industry have collectively lost 25.4% in the past year, while the Utility sector has declined 10.4%. The Zacks S&P 500 composite has gained 16.2% in the said time frame.
One-Year Price Performance
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 currently trading at trailing 12-month EV/EBITDA of 11.82X compared with the S&P 500’s 12.81X and the sector’s 18.44X. Over the past five years, the industry has traded as high as 14.73X, low of 10.05X and at the median of 12.64X.
Industry Versus S&P 500
Industry Versus Sector
To Sum Up
The necessity of additions to and improvement of gas distribution infrastructure positions U.S. pipeline operators well for growth. But the industry continues to face challenges from the renewable space. In addition, the outbreak of COVID-19 has forced utilities to delay or shelve their capital projects till the economic condition improves. Lower demand from the commercial as well as industrial customer group due to extended disruption in operations has also dampened the near-term prospect of this space.
Low interest rates will definitely assist natural gas pipeline operators in funding expansion projects but that will have to wait as demand and production are not expected to increase in the near term.
Gas Distribution Stocks in Focus
Below are four stocks that have been witnessing positive earnings estimate revisions. Of these, one has a Zacks Rank #2 (Buy) and the remaining three carry a Zacks Rank #3 (Hold).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
UGI Corporation (UGI - Free Report) : This Zacks Rank #2 King of Prussia, PA-based company distributes, stores, transports and markets energy products and related services through its subsidiaries. The Zacks Consensus Estimate for the company’s current-year earnings has moved 12.9% higher to $2.54 per share over the past 90 days. In the past three months, the stock has gained 10.9%.
Price and Consensus: UGI
National Fuel Gas Company (NFG - Free Report) : Zacks Rank #3 Williamsville, NY-based integrated energy company, has natural gas assets in the prolific Appalachian basin and oil-producing assets in California. The Zacks Consensus Estimate for the company’s current-year earnings moved 1.44% higher to $2.81 per sare over the past 7 days. In the past six months, the stock has gained 7%.
Price and Consensus: NFG
Atmos Energy Corporation (ATO - Free Report) : The Zacks Consensus Estimate for this Zacks Rank #3 Dallas TX-based gas distribution, pipeline and storage company’s earnings has moved 0.2% higher to $4.70 per share for the current year over the past 90 days. In the past 24 months, the stock has gained 9.9%.
Price and Consensus: ATO
Sempra Energy (SRE - Free Report) : The San Diego, CA-based company engages in providing electric and gas services in the United States and internationally. The Zacks Consensus Estimate for the company’s current-year earnings has moved 5.8% higher to $7.59 per share over the past 90 days. In the past 24 months, this Zacks Rank #3 stock has gained 9.3%. It currently has a Zacks Rank of 3.
Price and Consensus: SRE