The production of natural gas in the United States is likely to increase year over year in 2022 per the latest report by the U.S. Energy Information Administration (“EIA”) and continue driving stocks in the Zacks Utility Gas Distribution industry. The distribution companies offer services to transport natural gas from the region of production to millions of consumers across the United States.
Sempra Energy SRE, 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 time period. Steady investments and expanding infrastructure in key production regions should drive the performance of Atmos Energy Corporation ATO, National Fuel Gas Company NFG and NewJersey Resources Corporation NJR.
About the Industry
The shale revolution has substantially increased natural gas production. Its clean-burning nature is steadily boosting demand for natural gas in the electric power, industrial, commercial and residential 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 nearly 3 million miles of pipeline that ensures a steady supply to millions of customers. The concerns for the distribution 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. In addition, competition from other clean sources of energy can lower the demand for natural gas, consequently pushing down demand for pipelines.
Factors Shaping the Future of the Gas Distribution Industry
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 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 U.S. natural gas consumption to increase 4.33% in 2022 to 86.56 Bcf/d due to higher consumption from all customer groups, while 2023 consumption is expected to drop by 2.2% to 84.63 Bcf/d due to the expectation of milder winter temperature and lower consumption from the residential and commercial customer group. EIA expects U.S. 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. The higher production and export volumes will definitely increase the usage and demand for natural gas pipelines in the United States.
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 disruption of services. At present, natural gas distribution utilities provide services to over 75 million residential and 5 million commercial 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 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.
Scope for Fresh Investments: The clean-burning nature and wide availability across the United States are driving the demand for natural gas. The distribution network should continue to play a major role in transporting natural gas to nearly 75 million customers in all parts of the United States. The demand from the rising natural gas customer volume and usage of natural gas to produce electricity will play a pivotal role in the utilities’ gradual transition toward clean energy. With LNG export volumes rising each year and three new LNG export terminals are being developed in the United States, which will increase 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 natural gas to end-users, which will create new growth opportunities for natural gas pipeline operators.
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 15-stock group within the broader Zacks Utilities sector — currently carries a Zacks Industry Rank #159, which places it in the top 22% 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 is a result of a positive earnings outlook for the constituent companies in aggregate. Since March-end, earnings estimates have gone up by 0.8% to $3.93 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 S&P 500 and 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 collectively returned 20.5% in the same time frame, while the Utility sector has gained 5.5%. The Zacks S&P 500 composite has declined 16.1% in the said 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 a trailing 12-month EV/EBITDA of 10.19X compared with the S&P 500’s 11.54X and the sector’s 19.06X. Over the past five years, the industry has traded as high as 13.7X, a low of 9.58X, and at the median of 10.66X.
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. Only one out the four natural gas distribution stocks mentioned below presently carries a Zacks Rank #3 (Hold). The rest carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Sempra Energy: This San Diego, CA-based energy services holding company is involved in the sale, distribution, storage and transportation of electricity and natural gas. Sempra Energy has plans to invest $36 billion in the 2022-2026 time frame to strengthen its operation and transmission and distribution infrastructure. Worldwide demand growth for LNG continues to rise, Sempra Energy is well-positioned with strategically-located opportunities in North America. The stock currently carries a Zacks Rank #3.
The Zacks Consensus Estimate for SRE’s 2022 earnings has moved up 1.05% to $8.65 per share over the past 60 days. The current dividend yield of SRE is 2.75%. In the past year, the stock has gained 26.5% compared with the industry’s rally of 20.4%. Its long-term earnings growth (three to five years) rate is pegged at 5.8%.
Price and Consensus: SRE
Atmos Energy: This Dallas, TX-based company is engaged in the regulated natural gas distribution and storage business. Atmos Energy is planning to invest in the range of $13-$14 billion from fiscal 2022 through 2026, out of which more than 80% will be allocated to enhance the safety of the existing operations. The stock currently carries a Zacks Rank #2.
The Zacks Consensus Estimate for ATO’s fiscal 2022 earnings has moved 0.4% higher to $5.57 per share over the past 60 days. The current dividend yield of ATO is 2.41%. In the past year, the stock has gained 28.5%. The long-term earnings growth rate is pegged at 7.5%.
Price and Consensus: ATO
National Fuel Gas Company : This Williamsville, NY-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 across the natural gas value chain through Upstream, Midstream and Downstream activities gives it a competitive advantage and allows it to lower operating costs. NFG has more than $500 million worth of investments planned over the next five years for the modernization of pipeline transportation and distribution systems. The stock currently carries a Zacks Rank #2.
The Zacks Consensus Estimate for NFG’s fiscal 2022 earnings has moved 3.5% higher to $5.99 per share over the past 60 days. The current dividend yield of NFG is 2.79%. In the past year, the stock has gained 30.3%. The long-term earnings growth rate is pegged 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 has plans to invest $1-$1.3 billion in the fiscal 2022-2023 time period to strengthen its infrastructure. NJR’s strategic investments to expand natural gas transmission and distribution pipelines will allow it cater to increasing demand from its expanding customer base. The stock currently carries a Zacks Rank #2.
The Zacks Consensus Estimate for NJR’s fiscal 2022 earnings has moved 4.2% higher to $2.46 per share over the past 60 days. The current dividend yield of NJR 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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Sempra Energy (SRE) : Free Stock Analysis Report
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