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Weak Near-Term Outlook for Utility Gas Distribution Industry

Jewel Saha

The Zacks Utility Gas Distribution industry comprises companies that offer services to transport natural gas from the region of production to end users. Gas distribution 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.  

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:
 

  • Increasing U.S. shale production and the awareness to lower emission have pushed up natural gas production in the United States. Since capacity of the existing pipelines will eventually be inadequate to meet rising transportation requirements, pipeline operators will have enormous opportunities to add new ones. This is particularly true as natural gas is generally not stored at the consumption site like other conventional fossil fuel sources. Per the U.S. Energy Information Administration (EIA) release, natural gas production in the United States during the first half of 2019, averaged 89.9 billion cubic feet per day (Bcf/d), marking a 12.2% increase from levels in the first half of 2018. In the second half of 2019, EIA expects dry natural gas production to average 92.7 Bcf/d, implying a 7.1% increase from the second half of 2018. The natural gas growth forecast for 2020 is 1.6%.
     
  • The United States has started exporting LNG and volumes should increase as new LNG export terminals are coming into operation. So, demand for dedicated natural gas pipelines will increase as more of the commodity is transported from production zones to LNG export facilities. As a result, more pipelines are being planned in this region to take the produce to consumers and export terminals. EIA expects LNG export volumes to increase 28% year over year to 12.6 billion cubic feet per day (Bcf/d) in 2019, then increase further by 23% to 15.6 Bcf/d in 2020.
     
  • The ongoing improvement in U.S. natural gas production volumes and increasing LNG export volumes will also call for the addition and expansion of natural gas pipelines. Billions of dollars will be required to construct new natural gas pipelines required to transport natural gas to refineries, terminal and export facilities. The capital intensive industry will definitely benefit from the recent rate cuts announced by the Federal Reserve. Fed lowered the interest rate by one quarter basis point to a range of 2%-2.25%

 
Zacks Industry Rank Indicates Weak 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 17-stock group within the broader Zacks Utilities  sector — currently carries a Zacks Industry Rank #176, which places it at the bottom 31% of the 255 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.

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 Beat S&P 500 and Sector

The Gas Distribution industry has outperformed the Zacks S&P 500 composite and its own sector over the past year. The stocks in this industry have collectively gained 9.4% in the past year, while the Utility sector and the Zacks S&P 500 composite have gained 8.6% and 1.5%, respectively, over the same 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 13X compared with the S&P 500’s 11.46X and the sector’s 13.1X.  Over the past five years, the industry has traded as high as 14.16X, as low as 10.22X and at the median of 12.06X.

Trailing Five Years Enterprise Value-to EBITDA (EV/EBITDA)

Industry v S&P 500



Industry vs Sector



To Sum Up


The necessity of additions and improvement of gas distribution infrastructure position U.S. pipeline operators well for growth. But the industry continues to face challenges from the renewable space. The technological advances are lowering the cost of operating utility scale renewable power projects and government grants are making them attractive to utility operators. Moreover, rising natural gas production continues to put downward pressure on natural gas prices and producers of the commodity might lower production volumes to accommodate the drop in prices, which could mar the profitability of pipeline operators.
 
Gas Distribution Stocks to Add Now

Below are four stocks that have been witnessing positive earnings estimate revisions. Of these, one holds a Zacks Rank #2 (Buy) and the others carry a Zacks Rank #3 (Hold).

(You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.)

Southwest Gas Corporation (SWX): The consensus EPS estimate for this Zacks Rank #2, Las Vegas, NV-based gas distribution, gathering and processing company has moved 0.51% higher to $3.92 for the current year over the last 90 days. The stock has gained 14.3% in the past six months.

Price and Consensus: SWX
 



Spire Inc. (SR): The consensus EPS estimate for this St Louis, MO-based company that engages in the purchase, retail distribution and sale of natural gas to customers has moved 0.3% higher to $3.75 for the current year over the last 90 days. The Zacks Rank #3 stock has gained 3.7% in the past six months.

Price and Consensus: SR
 



South Jersey Industries (SJI): This Zacks Rank #3 Folsom, NJ-based company is involved in the sale, distribution, storage and transportation of natural gas. Its consensus EPS estimate has remained unchanged at $1.10 for 2019 over the last 90 days. The stock has gained 13.2% in the past six months.

Price and Consensus: SJI

 



ONE Gas Inc. (OGS): This Tulsa OK-based company, involved in the distribution of natural gas, has seen its consensus EPS estimate move 0.9% higher to $3.49 for 2019, over the last 90 days. The Zacks Rank #3 stock has gained 10.7% in the past six months.

Price and Consensus: OGS

 


 

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Southwest Gas Corporation (SWX) : Free Stock Analysis Report
 
Spire Inc. (SR) : Free Stock Analysis Report
 
South Jersey Industries, Inc. (SJI) : Free Stock Analysis Report
 
ONE Gas, Inc. (OGS) : Free Stock Analysis Report
 
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