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Utility Gas Distribution Industry Outlook: A Bumpy Road Ahead

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The Zacks Utility Gas Distribution industry comprises companies that offer services to transport natural gas from the region of production to end users. Gas distribution pipelines are crucial as consumption areas and storage facilities are often far from production sites. 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 more distribution pipelines.

Let us take a look at the industry’s three major themes:

  • Courtesy of booming U.S. shale production and the awareness to lower emission, natural gas production has been rising in the United States. Since capacity of the existing pipelines will eventually be inadequate to meet the rising transportation requirements, pipeline operators will have enormous opportunities to add new pipelines. This is particularly true because of the fact that natural gas is generally not stored at the consumption site like other conventional fossil fuel sources.
  • The United States has started exporting LNG and the volumes should increase as new LNG export terminals are coming into operation. So, demand for dedicated natural gas pipelines will increase as more natural gas is transported from production zones to LNG export facilities.
  • President Donald Trump’s decision to impose duties on steel imports will have an adverse impact on the development of new pipelines in the United States. This will significantly increase costs of pipeline operators for their large pipeline projects.

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 gloomy near-term prospects.

The Zacks Utility Gas Distribution industry, which is an 18-stock group within the broader Zacks Utilities sector, currently carries a Zacks Industry Rank #204, which places it at the bottom 20% of 257 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. Over the past six months, the industry’s earnings estimate for the current year has gone down nearly 1% while for next year it dropped 9.2%.
 
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, Beats Sector
 
The Gas Distribution industry has underperformed the Zacks S&P 500 composite but outperformed its own sector over the past year. The stocks in this industry have collectively gained 2.8% in the past year, while the Utility sector has dipped 5.5%. Meanwhile, the Zacks S&P 500 composite has gained 5.6% over the same period.

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 currently trading at trailing 12-month EV/EBITDA of 11.96X, compared with the S&P 500’s 10.79X and the sector’s 13.34X.

Over the past five years, the industry has traded as high as 14.43X, as low as 10.08X and at the median of 11.79X.

Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio

Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio

To Sum Up

The necessity of additions and improvement of the gas distribution infrastructure positions U.S. pipeline operators well for growth. But the industry faces challenges from the renewable space.

Moreover, rising production might create downward pressure on natural gas prices, which could mar the profitability of pipeline operators.

Gas Distribution Stocks to Buy Now

While none of the stocks in our gas distribution universe currently holds a Zacks Rank #1 (Strong Buy), below are four stocks that have been witnessing positive earnings estimate revisions. Of these, one carries 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 stocks here.)

One Gas Inc. (OGS - Free Report) : The consensus EPS estimate for this Zacks Rank #2 Tulsa, OK-based gas distribution company has moved 1.5% higher to $3.28 for the current year, over the last 60 days. The stock has gained 7.6% over the past year.

ONEOK Inc. (OKE - Free Report) : The consensus EPS estimate for this Tulsa, OK-based gas distribution, gathering and processing company has moved 4.8% higher to $2.83 for the current year, over the last 60 days. The stock has gained 19.5% over the past year.

National Fuel Gas Company (NFG - Free Report) : The consensus EPS estimate for this Williamsville, New York-based integrated energy company has moved 3% higher to $3.41 for the current year, over the last 60 days. The stock has gained 5.2% over the past six months.

Sempra Energy (SRE - Free Report) : This southern California-based energy services holding company, which is involved in the sale, distribution, storage and transportation of electricity and natural gas, has seen its consensus EPS estimate move 0.2% higher to $5.42 for the current year, over the last 30 days. The stock has gained 8.4% over the past six months.

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Sempra Energy (SRE) - free report >>

ONEOK, Inc. (OKE) - free report >>

ONE Gas, Inc. (OGS) - free report >>

National Fuel Gas Company (NFG) - free report >>

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