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4 Gas Distribution Stocks to Watch Amid Industry Woes

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The production of dry natural gas in the United States is likely to drop marginally in the second half of 2023, per the latest report by the U.S. Energy Information Administration (“EIA”), due to a decline in price, which will impact prospects of the stocks in the Zacks Utility Gas Distribution industry. Distribution companies offer services to transport natural gas from the region of production to millions of consumers across the United States.

Atmos Energy Corporation (ATO - Free Report) , 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 2023-2024 time frame. Steady investments and expanding infrastructure in key production regions should drive the performance of NewJersey Resources Corporation (NJR - Free Report) , MDU Resources Group (MDU - Free Report) and Spire Inc. (SR - Free Report) .

About the Industry

The shale revolution has substantially increased natural gas production. Its clean-burning nature is steadily boosting demand for natural gas from all customer groups. Natural gas distribution pipelines play a vital role 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 3 million miles of pipelines. Major concerns for the industry are aging infrastructure and increasing investment costs required to upgrade and maintain the vast network of pipelines due to the hike in interest rates. Competition from other clean sources of energy can lower demand for natural gas, and, consequently for pipelines.

Factors Shaping the Future of the Gas Distribution Industry

Aging Distribution Infrastructure: 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 the disruption of services. At present, natural gas distribution utilities provide services to over 80 million customers in the United States. Per a report from Business Roundtable, replacing the old pipelines will cost around $270 billion. To lower the possibility of interruption in services, the Department of Energy announced $33 million in funding for 10 projects involved in natural gas pipeline retrofitting to rehabilitate existing old cast iron and bare steel pipes. The Rapid Encapsulation of Pipelines Avoiding Intensive Replacement or the REPAIR program will ensure the 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 go up to $10 million per mile. The rising interest rates will increase the overall project financing cost for the utilities compared with what these companies have enjoyed in the past two years.

Production and Export Volumes of Gas to Increase: The short-term energy outlook released by the EIA indicates that domestic dry natural gas production will grow to 102.7 billion cubic feet per day (Bcf/d) in 2023 and increase 0.3% year over year to 102.7 Bcf/d in 2023. The increase in gas production volumes has dropped from earlier forecasts of EIA as drillers decided to cut production due to a drop in natural gas prices. Export volumes are expected to increase in 2023 and 2024, providing much relief to natural gas transporters. EIA expects U.S. liquefied natural gas (LNG) export volumes to increase nearly 14.2% year over year to 12.1 Bcf/d in 2023. Export volumes are expected to improve by 4.9% year over year in 2024.

Fresh Investments Create Demand: The clean-burning nature and wide availability across the United States are driving demand for natural gas. The distribution network will continue to play a major role in transporting natural gas to nearly 75 million customers in all parts of the United States. With three 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 three new LNG projects will increase the combined export capacity by 5.7 Bcf/d by 2025. As production and demand for natural gas are increasing, more pipelines will be required to safely transfer the commodity to end-users.


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 dull near-term prospects. The Zacks Utility Gas Distribution industry — a 12-stock group within the broader Zacks Utilities sector — currently carries a Zacks Industry Rank #164, which places it in the bottom 34% of the 250 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 a negative earnings outlook for the constituent companies in aggregate. Since Jun 30, 2022, earnings estimates have gone down by 8.4% to $4.04 per share.

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 Beats Sector But Lags S&P 500

The Gas Distribution industry has lost narrower than the sector but underperformed the Zacks S&P 500 composite over the past year. The stocks in this industry have collectively lost 12.2% in the same time frame compared with the Utility sector’s loss of 13.3%. The Zacks S&P 500 composite has gained  4.5% in the same 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 a trailing 12-month EV/EBITDA of 9.98X compared with the S&P 500’s 13.01X and the sector’s 17.55X. Over the past five years, the industry has traded as high as 13.88X, a low of 9.07X, and at the median of 10.29X.

Utility Gas Industry vs  S&P  500 ( Past 5 yrs)

Utility Gas Industry vs  Sector( Past 5 yrs)

4 Gas Distribution Stocks to Keep a Close Watch On

Below are four stocks that have been witnessing positive earnings estimate revisions. Two out of the four natural gas distribution stocks mentioned presently carry a Zacks Rank #2 (Buy). The other two carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Atmos Energy Corporation: This Dallas, TX-based company is engaged in the regulated natural gas distribution and storage business. Atmos Energy is planning to invest $11 billion through fiscal 2027. The stock currently carries a Zacks Rank #2. The Zacks Consensus Estimate for ATO’s fiscal 2023 earnings has moved 0.5% higher to $6.03 per share over the past 60 days. In the past three months, the stock has gained 2.5% compared with the industry’s rally of 0.5%. The long-term earnings (three to five years) growth rate is pegged at 7.5%.

Price and Consensus: ATO

New Jersey Resources: This Wall, NJ-based company provides regulated gas distribution, and retail and wholesale energy services to its customers. New Jersey Resources has plans to invest $1.1-$1.4 billion in the fiscal 2023-2024 period. The stock currently carries a Zacks Rank #2. The Zacks Consensus Estimate for NJR’s fiscal 2023 earnings has moved up 3.1% over the past 60 days. In the past year, the stock has gained 6.6% against the industry’s decline of 12.8%. Its long-term earnings growth rate is pegged at 6%.

Price and Consensus: NJR

MDU Resources Group: This Bismarck, ND-based company provides value-added natural resource products and related services to its customers. The company recently spin off its construction materials subsidiary, Knife River Corporation, and is focusing solely on its energy delivery business. The company has planned capital investments to further strengthen its gas distribution operations. The stock currently carries a Zacks Rank #3. The current dividend yield of MDU is 4.4%. The long-term earnings growth rate is pegged at 5.8%.

Price and Consensus: MDU

Spire Inc.: This St. Louis, MO-based, natural gas company is efficiently serving more than 1.7 million customers in the United States. In the 10-year period from fiscal 2023-2032, the company aims to invest $7 billion to strengthen its existing operations. The stock currently carries a Zacks Rank #3. The Zacks Consensus Estimate for SR’s fiscal 2023 earnings has moved 0.9% higher to $4.26 per share over the past 60 days. The long-term earnings growth rate is pegged at 4.2%. In the past six months, SR’s stock has experienced a relatively smaller decline than the broader industry over the past three months.

Price and Consensus: SR


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