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4 Gas Distribution Stocks to Watch Despite Industry Challenges
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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 (SRE - Free Report) , with its widespread transmission and distribution lines, interstate pipelines, and significant investments in infrastructure development projects, is poised to benefit from the expected increase in natural gas consumption. Steady investments and expanding infrastructure in crucial production regions should drive the performance of Atmos Energy Corporation (ATO - Free Report) , New Jersey Resources Corporation (NJR - Free Report) and ONE Gas (OGS - Free Report)
About the Industry
The shale revolution has substantially increased natural gas production. Its clean-burning nature has steadily boosted the 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 United States has 3,353 trillion cubic feet of natural gas, and a natural gas pipeline network of 2.6 million miles is utilized to distribute gas to customers. 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 the demand for natural gas and, consequently, for pipelines.
Factors Shaping the Future of the Gas Distribution Industry
Production and Export Volumes Increase: The short-term energy outlook released by the U.S. Energy Information Administration (EIA) indicates that domestic dry natural gas production in 2025 will be higher than 2024 levels due to an increase in production volume in the Permian Basin regions. EIA expects U.S. liquefied natural gas (LNG) export volumes in 2025 to improve 25% year over year. In 2026, LNG export volumes are expected to increase 6.7% year over year. Therefore, the gas pipelines will play a crucial role in transporting natural gas to these export terminals.
Interest Rate Decline is a Tailwind: To maintain, upgrade and expand operations, utilities approach capital markets for loans. Multiple rate hikes by the Federal Reserve took the benchmark rate to the 5.25-5.50% range, adversely impacting utility operators. The U.S. Federal Reserve has finally lowered the benchmark rate by 100 basis points, bringing down rates to a range of 4.25-4.5%. The Federal Reserve is expected to lower interest rates today, with more rate cuts expected in 2026. The capital-intensive domestic-focused utilities will benefit from the Fed’s decision to reduce interest rates. The drop in interest rates is a big positive for utility operators planning large investments in infrastructure upgrades.
Increasing competition from other clean sources: Natural gas is facing tough competition from other clean energy sources. Courtesy of the usage of new technology, setting up utility-scale renewable energy projects is becoming much cheaper than before. Battery storage projects are directly addressing the intermittency of renewable sources and ensuring a reliable and stable supply of 24x7 clean energy. With renewables becoming more affordable and on-site generation minimizing reliance on long-distance infrastructure, investments in new pipelines face rising economic risks.
Zacks Industry Rank Indicates Bleak Prospects
The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates weak 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 #190, which places it in the bottom 22% of the 245 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than two to one.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries results from a negative earnings outlook for the constituent companies in aggregate. Since Sept. 31, 2024, earnings estimates for 2025 have moved down by 20.9%.
Before we present a few Gas Distribution stocks that you may want to consider for your portfolio, let us look at the industry’s recent stock-market performance and valuation picture.
Gas Distribution Industry Lags S&P 500, But Beats Sector
The Gas Distribution industry has outperformed the Zacks S&P 500 composite and its sector over the past year. The stocks in this industry have gained 6.5% in the said time frame compared with the Utility sector’s growth of 5.4%. The Zacks S&P 500 composite has gained 19.9% in the same time frame.
Price Performance (One Year)
Gas Distribution Industry Trading at a Discount
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 11.28X compared with the Zacks S&P Composite 500’s 18.35X and the sector’s 15.06X. Over the past five years, the industry has traded at a high of 12.4X and a low of 9.55X, with a median of 10.9X.
Utility Gas Industry vs. S&P 500 (Past Five Years)
Utility Gas Industry vs. Sector (Past Five Years)
Despite Weakness in Industry, Gas Distribution Stocks to Add
Sempra Energy: This San Diego, CA-based company is involved in the sale, distribution, storage and transportation of electricity and natural gas. In the 2025-2029 time period, the company aims to invest $56 billion to strengthen its existing operations. It continues to gain from economic improvement in its service territories, resulting in customer additions and growth in demand.
The current dividend yield is 3.09% better than the Zacks S&P 500 Composite’s yield of 1.51%. Long-term (three to five years) earnings growth is currently pegged at 7.01%. The Zacks Consensus Estimate for SRE’s 2025 earnings has remained the same over the past 60 days, and the 2026 earnings estimate has moved up by 0.20% in the same time period.
Price and Consensus: SRE
Atmos Energy: This Dallas, TX-based company is engaged in the regulated natural gas distribution and storage business. Atmos Energy invested $2.94 billion in fiscal 2024 and plans to invest $3.7 billion in fiscal 2025 to strengthen its infrastructure further and efficiently serve more customers. It continues to replace old pipelines and provide reliable services to its expanding customer base.
The current dividend yield is 2.1%. Long-term earnings growth is currently pegged at 7.32%. The Zacks Consensus Estimate for ATO’s fiscal 2025 and 2026 earnings has moved up 0.96% and 0.9%, respectively, over the past 60 days.
Price and Consensus: ATO
New Jersey Resources: This Wall, NJ-based company provides reliable energy services to its expanding customer base. Given its earnings growth opportunities and strong return on equity, NJR makes for a solid investment option in the utility sector. New Jersey Resources makes consistent investments to upgrade and maintain its existing infrastructure. The company aims to invest in the range of $650-$770 million and $655-$835 million in fiscal 2025 and 2026. respectively.
The current dividend yield is 3.82%. The Zacks Consensus Estimate for NJR’s fiscal 2025 has moved up by 1.86% over the past 60 days.
Price and Consensus: NJR
ONE Gas Inc.: This Tulsa, OK, based 100% regulated natural gas distribution utility provides natural gas distribution services to more than 2.3 million customers. The company continues to make investments to strengthen its infrastructure and aims to invest $4 billion through 2029, a major portion of which will be directed toward system integrity and replacement projects.
The current dividend yield is 3.53%. Long-term earnings growth is pegged at 5.56%. The Zacks Consensus Estimate for OGS’ 2025 and 2026 earnings per share has moved up 1.17% and 1.12%, respectively, over the past 60 days.
Price and Consensus: OGS
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4 Gas Distribution Stocks to Watch Despite Industry Challenges
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 (SRE - Free Report) , with its widespread transmission and distribution lines, interstate pipelines, and significant investments in infrastructure development projects, is poised to benefit from the expected increase in natural gas consumption. Steady investments and expanding infrastructure in crucial production regions should drive the performance of Atmos Energy Corporation (ATO - Free Report) , New Jersey Resources Corporation (NJR - Free Report) and ONE Gas (OGS - Free Report)
About the Industry
The shale revolution has substantially increased natural gas production. Its clean-burning nature has steadily boosted the 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 United States has 3,353 trillion cubic feet of natural gas, and a natural gas pipeline network of 2.6 million miles is utilized to distribute gas to customers. 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 the demand for natural gas and, consequently, for pipelines.
Factors Shaping the Future of the Gas Distribution Industry
Production and Export Volumes Increase: The short-term energy outlook released by the U.S. Energy Information Administration (EIA) indicates that domestic dry natural gas production in 2025 will be higher than 2024 levels due to an increase in production volume in the Permian Basin regions. EIA expects U.S. liquefied natural gas (LNG) export volumes in 2025 to improve 25% year over year. In 2026, LNG export volumes are expected to increase 6.7% year over year. Therefore, the gas pipelines will play a crucial role in transporting natural gas to these export terminals.
Interest Rate Decline is a Tailwind: To maintain, upgrade and expand operations, utilities approach capital markets for loans. Multiple rate hikes by the Federal Reserve took the benchmark rate to the 5.25-5.50% range, adversely impacting utility operators. The U.S. Federal Reserve has finally lowered the benchmark rate by 100 basis points, bringing down rates to a range of 4.25-4.5%. The Federal Reserve is expected to lower interest rates today, with more rate cuts expected in 2026. The capital-intensive domestic-focused utilities will benefit from the Fed’s decision to reduce interest rates. The drop in interest rates is a big positive for utility operators planning large investments in infrastructure upgrades.
Increasing competition from other clean sources: Natural gas is facing tough competition from other clean energy sources. Courtesy of the usage of new technology, setting up utility-scale renewable energy projects is becoming much cheaper than before. Battery storage projects are directly addressing the intermittency of renewable sources and ensuring a reliable and stable supply of 24x7 clean energy. With renewables becoming more affordable and on-site generation minimizing reliance on long-distance infrastructure, investments in new pipelines face rising economic risks.
Zacks Industry Rank Indicates Bleak Prospects
The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates weak 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 #190, which places it in the bottom 22% of the 245 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than two to one.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries results from a negative earnings outlook for the constituent companies in aggregate. Since Sept. 31, 2024, earnings estimates for 2025 have moved down by 20.9%.
Before we present a few Gas Distribution stocks that you may want to consider for your portfolio, let us look at the industry’s recent stock-market performance and valuation picture.
Gas Distribution Industry Lags S&P 500, But Beats Sector
The Gas Distribution industry has outperformed the Zacks S&P 500 composite and its sector over the past year. The stocks in this industry have gained 6.5% in the said time frame compared with the Utility sector’s growth of 5.4%. The Zacks S&P 500 composite has gained 19.9% in the same time frame.
Price Performance (One Year)
Gas Distribution Industry Trading at a Discount
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 11.28X compared with the Zacks S&P Composite 500’s 18.35X and the sector’s 15.06X. Over the past five years, the industry has traded at a high of 12.4X and a low of 9.55X, with a median of 10.9X.
Utility Gas Industry vs. S&P 500 (Past Five Years)
Utility Gas Industry vs. Sector (Past Five Years)
Despite Weakness in Industry, Gas Distribution Stocks to Add
All four natural gas distribution stocks mentioned below currently carry a Zacks Rank #2 (Buy) each. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Sempra Energy: This San Diego, CA-based company is involved in the sale, distribution, storage and transportation of electricity and natural gas. In the 2025-2029 time period, the company aims to invest $56 billion to strengthen its existing operations. It continues to gain from economic improvement in its service territories, resulting in customer additions and growth in demand.
The current dividend yield is 3.09% better than the Zacks S&P 500 Composite’s yield of 1.51%. Long-term (three to five years) earnings growth is currently pegged at 7.01%. The Zacks Consensus Estimate for SRE’s 2025 earnings has remained the same over the past 60 days, and the 2026 earnings estimate has moved up by 0.20% in the same time period.
Price and Consensus: SRE
Atmos Energy: This Dallas, TX-based company is engaged in the regulated natural gas distribution and storage business. Atmos Energy invested $2.94 billion in fiscal 2024 and plans to invest $3.7 billion in fiscal 2025 to strengthen its infrastructure further and efficiently serve more customers. It continues to replace old pipelines and provide reliable services to its expanding customer base.
The current dividend yield is 2.1%. Long-term earnings growth is currently pegged at 7.32%. The Zacks Consensus Estimate for ATO’s fiscal 2025 and 2026 earnings has moved up 0.96% and 0.9%, respectively, over the past 60 days.
Price and Consensus: ATO
New Jersey Resources: This Wall, NJ-based company provides reliable energy services to its expanding customer base. Given its earnings growth opportunities and strong return on equity, NJR makes for a solid investment option in the utility sector. New Jersey Resources makes consistent investments to upgrade and maintain its existing infrastructure. The company aims to invest in the range of $650-$770 million and $655-$835 million in fiscal 2025 and 2026. respectively.
The current dividend yield is 3.82%. The Zacks Consensus Estimate for NJR’s fiscal 2025 has moved up by 1.86% over the past 60 days.
Price and Consensus: NJR
ONE Gas Inc.: This Tulsa, OK, based 100% regulated natural gas distribution utility provides natural gas distribution services to more than 2.3 million customers. The company continues to make investments to strengthen its infrastructure and aims to invest $4 billion through 2029, a major portion of which will be directed toward system integrity and replacement projects.
The current dividend yield is 3.53%. Long-term earnings growth is pegged at 5.56%. The Zacks Consensus Estimate for OGS’ 2025 and 2026 earnings per share has moved up 1.17% and 1.12%, respectively, over the past 60 days.
Price and Consensus: OGS