4 Gas Distribution Stocks to Watch in a Promising Industry – September 23, 2022

Natural gas production in the United States is likely to increase year-over-year in 2022 according to the latest report from the US Energy Information Administration (“EIA”) and continue to drive stocks in the gas distribution industry. Zacks utility. Distribution companies offer services to transport natural gas from the region of production to millions of consumers throughout the United States.

sempra energy (SRE Free Report), with its widespread natural gas infrastructure and systematic investments in infrastructure development projects, is poised to benefit as natural gas production volumes are expected to increase in the 2022-2023 period. Continued investments and infrastructure expansion in key production regions should boost the performance of Atmos Energy Corporation (ATTO free report), National Fuel Gas Company (NFG free report) and NewJersey Resources Corporation (NJR free report).

about the industry

The shale revolution has substantially increased natural gas production. Its clean-burning nature is steadily driving demand for natural gas in the residential, commercial, industrial and electric power markets. 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 almost 3 million miles of pipelines that ensure a constant supply to millions of customers. Concerns for the distribution industry are aging infrastructure and rising investment costs required to upgrade and maintain the vast pipeline network due to rising interest rates. In addition, competition from other clean energy sources can reduce the demand for natural gas and consequently reduce the demand for pipelines.

Factors shaping the future of the gas distribution industry

Gas production and export volumes will increase: The short-term energy outlook published by the EIA indicates that the national production of dry natural gas will grow 3.8% year over year to 97.09 billion cubic feet per day (Bcf/d) in 2022 and 3.4 % year-over-year to 100.36 Bcf/d in 2023. EIA also expects US natural gas consumption to increase 4.33% in 2022 to 86.56 Bcf/d due to higher consumption from all customer groups, while consumption in 2023 is expected to fall 2.2% to 84.63 Bcf/d due to the expectation of milder winter temperatures and lower consumption by the residential and commercial customer group. EIA expects US liquefied natural gas (LNG) export volumes to increase 12.8% year-over-year to 11.01 Bcf/d in 2022. EIA expects LNG export volumes to increase 12 .1% to 12.34 Bcf/d in 2023. Higher production and export volumes will definitely increase the use of and demand for natural gas pipelines in the United States.

Aging distribution infrastructure: Existing natural gas distribution pipelines in the US are aging. Leaks or breaks in these old cast iron and bare steel pipes can cause service interruption. Today, natural gas distribution utilities serve more than 75 million residential and 5 million commercial customers in the United States. According to a Business Roundtable report, replacing old pipes will cost around $270 billion. To reduce the possibility of service interruption, the Department of Energy announced $33 million in funding for 10 projects related to modernizing natural gas pipelines to rehabilitate existing aging cast iron and bare steel pipelines. The Rapid Pipeline Encapsulation Avoiding Intensive Replacement or REPAIR program will ensure the minimum extension of distribution pipeline life by 50 years and reduce the cost of replacing old pipelines by nearly 10 to 20 times per mile. Today, pipeline excavation and replacement costs can run as high as $10 million per mile. Rising interest rates will increase the total cost of project financing for utilities compared to what these companies have enjoyed in the last two years.

Scope for new investments: The clean-burning nature and wide availability in the United States are driving the demand for natural gas. The distribution network should continue to play an important role in transporting natural gas to nearly 75 million customers across the United States. Demand from the growing volume of natural gas customers and the use of natural gas to produce electricity will play a critical role in utilities’ gradual transition to clean energy. With LNG export volumes increasing each year and three new LNG export terminals being developed in the United States, this will increase the demand for pipeline services to transfer gas from production areas to these terminals. According to the EIA, once completed, the three new LNG projects will increase combined export capacity by 5.7 Bcf/d by 2025. As natural gas production and demand increase, more pipelines will be required to transfer from safely deliver natural gas to end users. , which will create new growth opportunities for natural gas pipeline operators.

Zacks Industry Ranking Indicates Bright Prospects

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

The Zacks Utilities Gas Distribution Industry, a group of 15 stocks within the broader Zacks Utilities sector, currently has a Zacks Industry Rank #159, placing it in the top 22% of 251 Zacks Industries. Our research shows that the top 50% of industries ranked by Zacks outperform the bottom 50% by a factor of more than 2 to 1.

The industry’s positioning in the top 50% of Zacks-ranked industries is the result of a positive earnings outlook for the constituent companies as a whole. From the end of March, earnings estimates rose 0.8% to $3.93 per share.

Before we introduce some gas distribution stocks you may want to consider for your portfolio, let’s take a look at recent stock market performance and the industry’s valuation landscape.

Industry Beats S&P 500 and Sector

The gas distribution industry has outperformed the Zacks S&P 500 composite and its sector over the past year. Shares in this industry have returned a collective 20.5% over the same time period, while the utilities sector has gained 5.5%. The Zacks S&P 500 Composite has declined 16.1% in that period.

One year price performance

Current valuation of the gas distribution industry

Since utilities have a large amount of debt on their balance sheets, the EV/EBITDA (Earnings Before Depreciation and Amortization of Interest Taxes) ratio is commonly used to value them.

The industry is currently trading at 10.19X trailing 12-month EV/EBITDA compared to 11.54X for the S&P 500 and 19.06X for the sector. Over the last five years, the industry has traded as high as 13.7X, a low of 9.58X and a median of 10.66X.

Utility Gas Industry vs. S&P 500 (Last 5 Years)

Utility gas industry vs sector (last 5 years)

4 Gas Distribution Stocks to Watch Closely

Below are four stocks that have seen positive revisions to earnings estimates. Only one of the four natural gas distribution stocks listed below currently has a Zacks #3 (hold) rank. The rest carry a Zacks Rank #2 (Buy). You can see the full list of today’s Zacks #1 Rank (Strong Buy) stock here.

sempra energy: This San Diego, CA-based energy services holding company is engaged in the sale, distribution, storage, and transportation of electricity and natural gas. Sempra Energy plans to invest $36 billion in the 2022-2026 period to strengthen its transmission and distribution operation and infrastructure. As global LNG demand growth continues to increase, Sempra Energy is well positioned with opportunities strategically located in North America. The stock currently has a Zacks #3 rank.

The Zacks Consensus Estimate for SRE’s 2022 earnings rose 1.05% to $8.65 per share over the past 60 days. The current dividend yield of the SRE is 2.75%. Last year the stock gained 26.5% compared to the industry rally of 20.4%. Its long-term earnings growth rate (three to five years) is pegged at 5.8%.

Price and Consensus: SRE

atmospheric energy: This company based in Dallas, TX is engaged in the regulated business of distribution and storage of natural gas. Atmos Energy plans to invest in the range of $13-$14 billion from fiscal year 2022 to 2026, of which more than 80% will be allocated to improving the safety of existing operations. The stock currently has a Zacks #2 rank.

The Zacks Consensus Estimate for ATO’s FY2022 earnings is up 0.4% to $5.57 per share over the last 60 days. ATO’s current dividend yield is 2.41%. In the past year, the stock has gained 28.5%. The long-term earnings growth rate is set at 7.5%.

Price and Consensus: ATO

National Fuel Gas Company : This Williamsville, New York-based integrated energy company has natural gas assets located in the prolific Appalachian Basin and oil-producing assets in California. National Fuel Gas Company’s presence throughout the natural gas value chain through Upstream, Midstream and Downstream activities gives it a competitive advantage and allows it to reduce operating costs. NFG has more than $500 million in investments planned over the next five years for pipeline modernization and distribution systems. The stock currently has a Zacks #2 rank.

The Zacks Consensus Estimate for NFG’s fiscal 2022 earnings increased 3.5% to $5.99 per share over the past 60 days. NFG’s current dividend yield is 2.79%. In the past year, the stock has gained 30.3%. The long-term earnings growth rate is set at 13.6%.

Price and Consensus: NFG

New Jersey Resources: This Wall, NJ-based company provides regulated gas distribution and retail and wholesale energy services to its customers. New Jersey Resources plans to invest $1-$1.3 billion in fiscal 2022-2023 to strengthen its infrastructure. NJR’s strategic investments to expand natural gas transmission and distribution pipelines will enable it to meet growing demand from its growing customer base. The stock currently has a Zacks #2 rank.

The Zacks Consensus Estimate for NJR’s fiscal 2022 earnings increased 4.2% to $2.46 per share over the past 60 days. NJR’s current dividend yield is 3.3%. In the past year, the stock has gained 27.2%. Its long-term earnings growth rate is pegged at 6%.

Price and Consensus: NJR

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