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With increasing focus on clean sources of energy, natural gas is gaining momentum in the United States. Expanding use of natural gas in the electric power, industrial, commercial and residential markets buoys demand for its distribution network, thus benefitting the Zacks Utility Gas Distribution industry. However, the natural gas distribution industry faces immense competition from other sources of renewables like solar, wind and many more.
Per The U.S. Energy Information Administration (EIA), the U.S. consumption of natural gas will average 82.9 billion cubic feet per day (Bcf/d) in 2021, down 0.5% from the 2020 level. This fall will be primarily due to rising natural gas prices that will adversely impact its usage in electric power generation. The natural gas share in electricity generation in the United States will average 36% in 2021 and 35% in 2022, down from 39% in 2020. The expected reduction in consumption of natural gas is likely to hurt demand for natural gas pipelines. Per the EIA, the annual U.S. marketed natural gas production will decline 2% in 2021 while the trend will reverse for the metric to inch up 2% in 2022.
Moreover, the existing distribution pipelines are aging. Hence, any leakage or breaks in these might disrupt services. To serve its customer base effectively, the companies in the industry need to invest substantially. Per a Business Roundtable report, replacing the old pipelines will cost nearly $270 billion. Furthermore, the currently low-interest rate environment will help utilities procure funding at cheaper rates.
Against this backdrop, we run a comparative analysis of two prominent gas distribution utilities, namely ONEOK, Inc. OKE and MDU Resources MDU to determine, which stock is better poised right now.
Both stocks currently carry a Zacks Rank #3 (Hold). ONEOK and MDU Resources have a market capitalization of $25.20 billion and $6.42 billion, respectively. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
While the Zacks Consensus Estimate for ONEOK’s 2021 earnings per share has moved 4.1% north to $3.33, the same for MDU Resources has gained 0.5% to $2.08 in the past 60 days.
Earnings Surprise & Long-Term Growth
ONEOK delivered a trailing surprise of 8.86% in the last reported quarter. Its long-term (three to five years) earnings growth is projected at 6%.
MDU Resources delivered a trailing surprise of 30% in the last reported quarter. Its long-term earnings growth rate is pegged at 6.63%.
Return on Equity (ROE)
ROE is the measure of a company’s efficiency in utilizing its shareholders’ funds. ONEOK and MDU Resources have a trailing 12-month ROE of 18.61% and 13.80%, respectively. The industry’s ROE for the same period came in at 12.67%.
Debt to Capital
The total debt-to-capital ratio is a perfect indicator of a company’s financial position and shows how much debt is used in running its business. ONEOK has a long-term debt-to-capital of 69.94%, much higher than MDU Resources’ 42.63%. The utility gas distribution industry’s average long-term debt-to-capital is 55.61%.
Times interest earned (TIE) ratio of ONEOK at the end of first-quarter 2021 was 2.99, better than 2.13 recorded at the end of fourth-quarter 2020. The same for MDU Resources improved from 5.92 to 6.33. A greater than one TIE ratio reflects the companies’ financial strength and their ability to meet their debt obligations.
ONEOK reaffirmed its expectations for growth and maintenance capital expenditures in the band of $335-$465 million and $190-$210 million, respectively, in 2021.
MDU Resources reduced its investment plans to $810.5 million from $826 million in the ongoing year. It expects to invest $3,032 million during the 2021-2025 forecast period. During the same time frame, it anticipates investing $606 million and $970 million in electric and natural gas distribution businesses, respectively.
In the past year, shares of ONEOK have rallied 77.8% while the MDU Resources stock has surged 44.7%. The industry has recorded 24.2% growth in the said period.
One-Year Price Performance
Image Source: Zacks Investment Research
ONEOK has a better price performanceand ROE while MDU Resources has a superior planned capital budget, earnings surprise, long-term growth rate and financial position. These factors reflect that both utilities are progressing on par and area promising choice. But looking at the Style Score, MDU Resources has a VGM score of A compared with ONEOK's score of C, making us believe that MDU Resources is better positioned as a natural gas distribution stock for 2021.
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ONEOK, Inc. (OKE) : Free Stock Analysis Report
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