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4 Gas Distribution Stocks to Watch Amid Decline in Demand

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·9 min read
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Natural gas is now a preferred choice of fuel in the United States due to its clean burning nature but faces competition from other clean sources like renewable energy. The wide usage of natural gas in the electric power, industrial, commercial and residential markets increases the demand for a natural gas distribution network.

Despite an expected decline in demand for natural gas in 2021 as per the latest report by the U.S. Energy Information Administration (“EIA”), we expect the benefits of natural gas to continue driving its distribution industry.  As the vaccines are being gradually rolled out in the United States, we expect demand for natural gas to recover in the second half of this year, with increase in industrial and commercial activities. ONEOK Inc. (OKE), with its widespread infrastructure in key production areas and long-term, fee-based commitments, is poised to benefit when natural gas production volumes increase to touch normal levels. Other utilities worth holding in one’s portfolio include UGI Corporation (UGI), MDU Resources Group Inc. (MDU) and National Fuel Gas Company (NFG).


About the Industry

The Zacks Utility Gas Distribution industry comprises companies that offer services to transport natural gas from the region of production to end users. Gas 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 that ensure supply to millions of households. 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:
 

  • Reduction in Consumption of Natural Gas: The recent short-term energy outlook release by EIA indicates domestic natural gas consumption of 79.4 billion cubic feet per day (Bcf/d) for 2021, down 4.8% from 2020. The decline in consumption will be primarily due to rising natural gas prices that can adversely impact usage of natural gas in electric power generation. Per EIA, in 2021, natural gas share in electricity generation is expected to drop to 34% from 39% in 2020. As a consequence, production of natural gas in 2021 is expected to drop to 87.9 Bcf/d in 2021 from 90.9 Bcf/d in 2020. The decline in consumption and production of natural gas will also adversely affect demand for natural gas pipelines.
     

  • 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 in the natural gas distribution of the United States will cost around $270 billion. To lower the possibility of interruption in services, the Department of Energy announced $38.5 million funding for a program that will promote the development of new technologies to strengthen cast iron and bare steel natural gas distribution pipes by creating a new pipe inside the old pipe. The Rapid Encapsulation of Pipelines Avoiding Intensive Replacement or the REPAIR program will ensure 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 current near-zero interest rate will assist utilities in sourcing funds for their capital projects at a cheaper rate.
     

  • Scope for Fresh Investments: Clean burning nature and wide availability across the United States is driving the demand for natural gas. Temporary obstacles like the outbreak of COVID-19 or price increases will not dampen the long-term prospect of natural gas and distribution network will continue to play a major role in its supply. EIA expects U.S. LNG exports to increase in 2021 and average 8.5 Bcf/d in 2021, reflecting a 30% increase from 2020. Apart from replacing the aging pipelines, the demand for natural gas will continue to increase with the opening up of industrial and commercial activities post COVID-19 vaccination.


Zacks Industry Rank Indicates Dull Prospects

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

The Zacks Utility Gas Distribution industry — a 16-stock group within the broader Zacks Utilities sector — currently carries a Zacks Industry Rank #216, which places it in the bottom 15% of the 254 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 bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. In the past one year, estimates for 2021 have declined by 30.9%.

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 Lags S&P 500 & Sector

The Gas Distribution industry has underperformed the Zacks S&P 500 composite and its own sector over the past year. The stocks in this industry have collectively lost 26.3% in the same time frame, while the Utility sector has declined 7.3%. The Zacks S&P 500 composite has gained 16.3% 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 trailing 12-month EV/EBITDA of 11.61X compared with the S&P 500’s 16.76X and the sector’s 17.5X.  Over the past five years, the industry has traded as high as 15.06X, low of 10.23X and at the median of 12.65X.


Industry Versus S&P 500 ( five years)


Industry Versus Sector ( five years)


4 Gas Distribution Stocks to Keep a Close Watch On

Below are four stocks that have been witnessing positive earnings estimate revisions. Out of these, two have a Zacks Rank #2 (Buy) and the remaining two carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

 

ONEOK Inc: This Zacks Rank #2, Tulsa, OK-based company is engaged in natural gas and natural gas liquids (“NGL”) businesses.  The company will continue to gain from long–term, fee-based earnings contract and location of its assets in the highly productive regions of the United States. Courtesy of completed projects and 40,000 miles of NGL and natural gas pipelines in the most prolific U.S. shale basins, the company is well poised to gain traction once production volumes improve from the present levels.

The Zacks Consensus Estimate for the company’s 2021 earnings has moved 8.3% higher to $2.88 per share over the past 60 days. The current dividend yield of the company is 9.9%. In the past three months, the stock has gained 34.8%. Long-term earnings growth (three to five years) is pegged at 4.6%.


Price and Consensus: OKE

 

National Fuel Gas Company: This Zacks Rank #2 Williamsville, NY-based integrated energy company, has natural gas assets in the prolific Appalachian basin and oil-producing assets in California.  National Fuel Gas’ acquisition of Royal Dutch Shell’s Upstream and Midstream Assets in Pennsylvania is accretive to its earnings.

The Zacks Consensus Estimate for the company’s fiscal 2021 earnings has moved 1.9% higher to $3.74 per share over the past 60 days. The current dividend yield of the company is 4.3%. In the past three months, the stock has gained 0.1%.


Price and Consensus: NFG

 

MDU Resources Group: Bismarck, ND-based, company provides value-added natural resource products and related services that are essential for energy transportation, regulated energy delivery, and the construction materials and services business. Its two-platform business model, regulated energy delivery platform as well as construction materials and services platform provides it an advantage over its peers. MDU Resources through the expansion of its North Bakken Expansion, expected to be completed in 2021, will add another 250 MMcf per day gas transportation capacity.

The Zacks Consensus Estimate for the company’s 2021 earnings has moved 2.6% higher to $1.95 per share over the past 60 days. The current dividend yield of the company is 3.3%. In the past three months, the stock has gained 11.2%. Long-term earnings growth is pegged at 5%.

 

 

Price and Consensus: MDU

 

UGI Corporation: This Zacks Rank #3, King of Prussia, PA-based company distributes, stores, transports and markets energy products and related services through its subsidiaries. The company continues to expand its operation and customer base organically and through acquisitions. Consistent performance of the company has enabled it to reward its shareholders through raise in annual dividend rates and share repurchase.

The Zacks Consensus Estimate for the company’s fiscal 2021 earnings has moved 1.4% higher to $2.90 per share over the past 60 days. The current dividend yield of the company is 3.8%. In the past three months, the stock has gained 2%. Long-term earnings growth is pegged at 8%.


Price and Consensus: UGI

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UGI Corporation (UGI) : Free Stock Analysis Report
 
ONEOK, Inc. (OKE) : Free Stock Analysis Report
 
National Fuel Gas Company (NFG) : Free Stock Analysis Report
 
MDU Resources Group, Inc. (MDU) : Free Stock Analysis Report
 
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