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Outlook for Utility Gas Distribution Industry Looks Bright

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 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 domestic natural gas production. 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, dry natural gas production in the United States in 2019, will average 92.1 billion cubic feet per day (Bcf/d), marking a 10% increase from 2018. The dry natural gas production is expected to improve by 3.3% in 2020 from the 2019 levels.
     
  • The United States has started exporting liquefied natural gas (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. The EIA report shows that total LNG export in the first half of 2019 were 37% higher compared with same period in 2018. With new export facilities coming online, U.S. LNG export volumes are estimated to touch 8.9 Bcf/d in 2020, up from 4.9 Bcf/d in 2018.
     
  • 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 three rate cuts announced by the Federal Reserve in 2019.


Zacks Industry Rank Indicates Strong Prospects

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates upbeat 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 #81, which places it at the top 32% of the 253 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 positive 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 Beats Sector But Lags S&P 500

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 10.5% in the past year, while the Utility sector has declined 5.4% and the Zacks S&P 500 composite has gained 20.1%.

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 14.16X compared with the S&P 500’s 11.55X and the sector’s 17.48X.  Over the past five years, the industry has traded as high as 14.45X, low of 10.22X and at the median of 12.38X.

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 positions 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 prices and producers of the commodity might lower production volumes to accommodate the drop, 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, two hold 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.

Atmos Energy Corporation (ATO): The consensus EPS estimate for this Zacks Rank #2, Dallas TX-based gas distribution, pipeline and storage company has moved 0.9% higher to $4.67 for the current year over the last 60 days. Year to date, the stock has gained 14.9%.

Price and Consensus: ATO


 
Sempra Energy (SRE): The consensus EPS estimate for this San Diego, CA-based company that engages in providing electric and gas services in the United States and internationally has moved 2.3% higher to $6.13 for the current year over the last 60 days. Year to date, shares of this Zacks Rank #3 stock has gained 35.7%.

Price and Consensus: SRE



ONE Gas Inc. (OGS): This Tulsa OK-based company, which is involved in the distribution of natural gas, has seen its consensus EPS estimate move 0.3% higher to $3.50 for 2019, over the last 60 days. The Zacks Rank #2 stock has gained 13% in the year-to-date period.

Price and Consensus: OGS



ONEOK Inc. (OKE): This Zacks Rank #3 Tulsa, OK-based company is involved in gathering, processing, storage, and transportation of natural gas in the United States. It has expected long-term earnings (three to five years) growth of 10.68%. The company delivered a positive average earnings surprise of 3.17% in the last four quarters. Its consensus EPS estimate has remained unchanged at $3.09 for 2019 over the last 7 days. Year to date, the stock has gained 35.1%.


Price and Consensus: OKE


 
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Sempra Energy (SRE) : Free Stock Analysis Report
 
ONEOK, Inc. (OKE) : Free Stock Analysis Report
 
ONE Gas, Inc. (OGS) : Free Stock Analysis Report
 
Atmos Energy Corporation (ATO) : Free Stock Analysis Report
 
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