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4 Gas Distribution Stocks to Watch in a Prospering Industry
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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 as natural gas production volumes are expected to increase in 2024-2025. Steady investments and expanding infrastructure in crucial production regions should drive the performance of Atmos Energy Corporation (ATO - Free Report) , MDU Resources Group (MDU - Free Report) and New Jersey Resources Corporation (NJR - Free Report) .
About the Industry
The shale revolution has substantially increased natural gas production. Its clean-burning nature steadily boosts 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 natural gas network in the United States has 2.3 million miles of underground distribution pipelines. 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 & Export Volumes of Gas to Increase: The short-term energy outlook released by the U.S. Energy Information Administration (EIA) indicates that domestic dry natural gas production will remain similar to the 2023 levels in 2024 and increase 1.3% year over year to 104.9 billion cubic feet per day (Bcf/d) in 2025. EIA also forecasts gas consumption to increase 0.9% year over year to 89.9 Bcf/d in 2024. Export volumes are expected to increase in 2024 and 2025, providing much relief to natural gas transporters. EIA expects U.S. liquefied natural gas (LNG) export volumes to increase 2% year over year to 12.2 Bcf/d in 2024 and exports to increase 18% to 14.3 Bcf/d in 2025. This indicates the need for more pipelines to send LNG to export terminals.
Fresh Investments Create Opportunities: The clean-burning nature and wide availability of natural gas across the United States are driving demand. At present, 187 million Americans use natural gas. The distribution network will continue to transport natural gas to all parts of the United States. With five 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 five new LNG projects will increase the combined export capacity by 9.7 Bcf/d by 2025. Per the American Gas Association report, one residential customer signs up for natural gas service every minute and 80 businesses add natural gas service each day. As production and demand for natural gas increase, more pipelines will be required to safely transfer the commodity to end-users. Per the report, natural gas utilities are investing $33 billion each year in increasing the reliability of natural gas distribution and transmission systems, indicating long-term growth potential in this space.
Unlikely Interest Rate Hike Acts as a Tailwind: In order to maintain, upgrade and expand operations, utilities approach capital markets for loans. The utilities have been enjoying near-zero interest rates for the past few years. However, multiple rate hikes by the Federal Reserve took the benchmark rate to 5.25-5.50%, which impacted utility operators. However, in its last few meetings, the Fed did not increase the benchmark rate. In the recently concluded Fed meeting, interest rates were unchanged and the Fed officials indicated that it would probably take longer for central bankers to consider a rate decline. The likely drop in interest rates would be a positive for utility operators who are planning large investments in infrastructure upgrades and the addition of renewable sources of energy to produce electricity.
Zacks Industry Rank Indicates Bright 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 14-stock group within the broader Zacks Utilities sector — currently carries a Zacks Industry Rank #65, which places it in the top 26% of the 251 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 results from a positive earnings outlook for the constituent companies in aggregate. Since Aug 31, 2023, earnings estimates for 2024 have moved up 1.14%.
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.
Industry Lags Sector & S&P 500
The Gas Distribution industry has underperformed the Zacks S&P 500 composite and the sector over the past year. The stocks in this industry have collectively lost 6.3% in the same time frame compared with the Utility sector’s fall of 4.5%. The Zacks S&P 500 composite has gained 23.6% 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 trading at a trailing 12-month EV/EBITDA of 9.57X compared with the S&P 500’s 14.54X and the sector’s 14.9X. Over the past five years, the industry traded at a high of 14.3X, a low of 9.08X and a median of 10.37X.
Utility Gas Industry vs. S&P 500 (Past Five yrs)
Utility Gas Industry vs. Sector (Past Five yrs)
4 Gas Distribution Stocks to Keep a Close Watch on
Atmos Energy: This Dallas, TX-based company is engaged in the regulated natural gas distribution and storage business. Atmos Energy invested $2.8 billion in fiscal 2023 and plans to invest $2.9 billion in fiscal 2024 to strengthen its infrastructure further and efficiently serve more customers.
The company continues to replace old pipelines and provide reliable services to its expanding customer base. The current dividend yield is 2.73%, better than the Zacks S&P 500 composite’s yield of 1.6%. The Zacks Consensus Estimate for ATO’s fiscal 2024 earnings has moved 0.3% higher to $6.60 per share over the past 60 days. The stock currently carries a Zacks Rank #2.
Price and Consensus: ATO
MDU Resources: This Bismarck, ND-based company provides value-added natural resource products and related services to its customers. The company spun off its construction materials subsidiary, Knife River Corporation, and focuses solely on its energy delivery business.
The company planned $609 million in capital investments in 2024 to strengthen its gas distribution operations further. MDU continues to add customers to its operating territories, which is boosting the demand for its services. For 2024-2028, it plans to invest $2.76 billion. The current dividend yield is 2.02%. The Zacks Consensus Estimate for MDU’s 2024 earnings moved up 0.7% in the last 60 days to $1.50 per share. The stock currently carries a Zacks Rank #2.
Price and Consensus: MDU
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 expects capital investments of $608-$743 million and $578-$742 million for fiscal 2024 and 2025, respectively.
The current dividend yield is 3.85%. The Zacks Consensus Estimate for NJR’s fiscal 2024 earnings has moved 2.4% higher to $2.94 per share over the past 60 days. The stock currently carries a Zacks Rank #2.
Price and Consensus: NJR
Sempra Energy: This San Diego, CA-based company is involved in the sale, distribution, storage and transportation of electricity and natural gas. In 2024-2028, the company aims to invest $40.4 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 3.46%. The Zacks Consensus Estimate for SRE’s 2024 earnings has moved 0.2% higher to $4.82 per share over the past 30 days. The stock currently carries a Zacks Rank #3.
Price and Consensus: SRE
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4 Gas Distribution Stocks to Watch in a Prospering Industry
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 as natural gas production volumes are expected to increase in 2024-2025. Steady investments and expanding infrastructure in crucial production regions should drive the performance of Atmos Energy Corporation (ATO - Free Report) , MDU Resources Group (MDU - Free Report) and New Jersey Resources Corporation (NJR - Free Report) .
About the Industry
The shale revolution has substantially increased natural gas production. Its clean-burning nature steadily boosts 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 natural gas network in the United States has 2.3 million miles of underground distribution pipelines. 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 & Export Volumes of Gas to Increase: The short-term energy outlook released by the U.S. Energy Information Administration (EIA) indicates that domestic dry natural gas production will remain similar to the 2023 levels in 2024 and increase 1.3% year over year to 104.9 billion cubic feet per day (Bcf/d) in 2025. EIA also forecasts gas consumption to increase 0.9% year over year to 89.9 Bcf/d in 2024. Export volumes are expected to increase in 2024 and 2025, providing much relief to natural gas transporters. EIA expects U.S. liquefied natural gas (LNG) export volumes to increase 2% year over year to 12.2 Bcf/d in 2024 and exports to increase 18% to 14.3 Bcf/d in 2025. This indicates the need for more pipelines to send LNG to export terminals.
Fresh Investments Create Opportunities: The clean-burning nature and wide availability of natural gas across the United States are driving demand. At present, 187 million Americans use natural gas. The distribution network will continue to transport natural gas to all parts of the United States. With five 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 five new LNG projects will increase the combined export capacity by 9.7 Bcf/d by 2025. Per the American Gas Association report, one residential customer signs up for natural gas service every minute and 80 businesses add natural gas service each day. As production and demand for natural gas increase, more pipelines will be required to safely transfer the commodity to end-users. Per the report, natural gas utilities are investing $33 billion each year in increasing the reliability of natural gas distribution and transmission systems, indicating long-term growth potential in this space.
Unlikely Interest Rate Hike Acts as a Tailwind: In order to maintain, upgrade and expand operations, utilities approach capital markets for loans. The utilities have been enjoying near-zero interest rates for the past few years. However, multiple rate hikes by the Federal Reserve took the benchmark rate to 5.25-5.50%, which impacted utility operators. However, in its last few meetings, the Fed did not increase the benchmark rate. In the recently concluded Fed meeting, interest rates were unchanged and the Fed officials indicated that it would probably take longer for central bankers to consider a rate decline. The likely drop in interest rates would be a positive for utility operators who are planning large investments in infrastructure upgrades and the addition of renewable sources of energy to produce electricity.
Zacks Industry Rank Indicates Bright 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 14-stock group within the broader Zacks Utilities sector — currently carries a Zacks Industry Rank #65, which places it in the top 26% of the 251 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 results from a positive earnings outlook for the constituent companies in aggregate. Since Aug 31, 2023, earnings estimates for 2024 have moved up 1.14%.
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.
Industry Lags Sector & S&P 500
The Gas Distribution industry has underperformed the Zacks S&P 500 composite and the sector over the past year. The stocks in this industry have collectively lost 6.3% in the same time frame compared with the Utility sector’s fall of 4.5%. The Zacks S&P 500 composite has gained 23.6% 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 trading at a trailing 12-month EV/EBITDA of 9.57X compared with the S&P 500’s 14.54X and the sector’s 14.9X. Over the past five years, the industry traded at a high of 14.3X, a low of 9.08X and a median of 10.37X.
Utility Gas Industry vs. S&P 500 (Past Five yrs)
Utility Gas Industry vs. Sector (Past Five yrs)
4 Gas Distribution Stocks to Keep a Close Watch on
Three of the four natural gas distribution stocks mentioned below currently have a Zacks Rank #2 (Buy), and the remaining one carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Atmos Energy: This Dallas, TX-based company is engaged in the regulated natural gas distribution and storage business. Atmos Energy invested $2.8 billion in fiscal 2023 and plans to invest $2.9 billion in fiscal 2024 to strengthen its infrastructure further and efficiently serve more customers.
The company continues to replace old pipelines and provide reliable services to its expanding customer base. The current dividend yield is 2.73%, better than the Zacks S&P 500 composite’s yield of 1.6%. The Zacks Consensus Estimate for ATO’s fiscal 2024 earnings has moved 0.3% higher to $6.60 per share over the past 60 days. The stock currently carries a Zacks Rank #2.
Price and Consensus: ATO
MDU Resources: This Bismarck, ND-based company provides value-added natural resource products and related services to its customers. The company spun off its construction materials subsidiary, Knife River Corporation, and focuses solely on its energy delivery business.
The company planned $609 million in capital investments in 2024 to strengthen its gas distribution operations further. MDU continues to add customers to its operating territories, which is boosting the demand for its services. For 2024-2028, it plans to invest $2.76 billion. The current dividend yield is 2.02%. The Zacks Consensus Estimate for MDU’s 2024 earnings moved up 0.7% in the last 60 days to $1.50 per share. The stock currently carries a Zacks Rank #2.
Price and Consensus: MDU
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 expects capital investments of $608-$743 million and $578-$742 million for fiscal 2024 and 2025, respectively.
The current dividend yield is 3.85%. The Zacks Consensus Estimate for NJR’s fiscal 2024 earnings has moved 2.4% higher to $2.94 per share over the past 60 days. The stock currently carries a Zacks Rank #2.
Price and Consensus: NJR
Sempra Energy: This San Diego, CA-based company is involved in the sale, distribution, storage and transportation of electricity and natural gas. In 2024-2028, the company aims to invest $40.4 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 3.46%. The Zacks Consensus Estimate for SRE’s 2024 earnings has moved 0.2% higher to $4.82 per share over the past 30 days. The stock currently carries a Zacks Rank #3.
Price and Consensus: SRE