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Bright Near-Term Outlook for Utility Gas Distribution Industry

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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 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.

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

  • Increasing U.S. shale production and the awareness to lower emission have pushed up natural gas production in the United States. Since capacity of the existing pipelines will eventually be inadequate to meet rising transportation requirements, pipeline operators will have enormous opportunities to add new ones. This is particularly true due to 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 volumes should increase as new LNG export terminals are coming into operation. So, demand for dedicated natural gas pipelines will increase as more of the commodity is transported from production zones to LNG export facilities. In addition, increasing oil and natural gas production from the Permian Basin region is creating a bottleneck in transporting the commodities. As a result, more pipelines are being planned in this region to take the produce to consumers and export terminals.
     
  • Per the U.S. Energy Information Administration (EIA) release, natural gas production in the United States will increase by 7% per year during the 2018 to 2020 time period, primarily due to higher domestic consumption and improving exports. The improvement in natural gas production will also call for the addition and expansion of natural gas pipelines. Recently, the U.S. Federal Energy Regulatory Commission (FERC) approved the full in-service of the Mountaineer XPress natural gas pipeline project. For the next few years, more investments in natural gas pipelines are lined up to meet rising demand for pipeline services.  


Zacks Industry Rank Indicates Strong Prospects

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright near-term prospects.

The Zacks Utility Gas Distribution industry — a 17-stock group within the broader Zacks Utilities sector — currently carries a Zacks Industry Rank #78, which places it at the top 30% 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 top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate.

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 Beat S&P 500 and Sector

The Gas Distribution industry has outperformed the Zacks S&P 500 composite and its own sector over the past year. The stocks in this industry have collectively gained 18% in the past year, while the Utility sector and the Zacks S&P 500 composite have gained 10% each 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 is currently trading at trailing 12-month EV/EBITDA of 13.04X compared with the S&P 500’s 10.96X and the sector’s 14.73X.

Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio of Industry v S&P 500

Over the past five years, the industry has traded as high as 14.16X, as low as 10.22X and at the median of 11.80X.

Trailing Five Years Enterprise Value-to EBITDA (EV/EBITDA) Ratio of Industry vs S&P 500

 



To Sum Up

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

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

Gas Distribution Stocks to Buy Now

Below are four stocks that have been witnessing positive earnings estimate revisions. Of these, two hold a Zacks Rank #2 (Buy) and the other two carry a Zacks Rank #3 (Hold).

(You can see the complete list of today’s Zacks #1 Rank stocks here.)

ONEOK Inc. (OKE - Free Report) : The consensus EPS estimate for this Zacks Rank #2, Tulsa, OK-based gas distribution, gathering and processing company has moved 2.06% higher to $2.97 for the current year over the last 60 days. The stock has gained 24.4% in the past year.

Price and Consensus: OKE



Spire Inc. (SR - Free Report) : The consensus EPS estimate for this St Louis, MO-based company that engages in the purchase, retail distribution and sale of natural gas to customers has moved 0.8% higher to $3.74 for the current year over the last 60 days. The Zacks Rank #2 stock has gained 14.3% in the past year.

Price and Consensus: SR



Atmos Energy Corporation (ATO - Free Report) : This Zacks Rank #3 Dallas TX based company is involved in the sale, distribution, storage and transportation of natural gas. It has seen the consensus EPS estimate move 0.2% higher to $4.29 for the current year over the last 60 days. The stock has gained 24.3% in the past year.

Price and Consensus: ATO



Sempra Energy (SRE - Free Report) : This southern California-based company, 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 $6.01 for the current year, over the last 30 days. The Zacks Rank #3 stock has gained 14.3% in the past year.

Price and Consensus: SRE



Zacks' Top 10 Stocks for 2019

In addition to the stocks discussed above, wouldn't you like to know about our 10 finest buy-and-holds for the year?

From more than 4,000 companies covered by the Zacks Rank, these 10 were picked by a process that consistently beats the market. Even during 2018 while the market dropped -5.2%, our Top 10s were up well into double-digits. And during bullish 2012 – 2017, they soared far above the market's +126.3%, reaching +181.9%.

This year, the portfolio features a player that thrives on volatility, an AI comer, and a dynamic tech company that helps doctors deliver better patient outcomes at lower costs.

See Stocks Today >>


See More Zacks Research for These Tickers


Normally $25 each - click below to receive one report FREE:


Sempra Energy (SRE) - free report >>

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

Atmos Energy Corporation (ATO) - free report >>

Spire Inc. (SR) - free report >>

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