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Zacks Industry Outlook Highlights Sempra Energy, Atmos Energy, NewJersey Resources and Northwest Natural Holding

For Immediate Release

Chicago, IL – December 22, 2022 – Today, Zacks Equity Research discusses Sempra Energy SRE, Atmos Energy Corp. ATO, NewJersey Resources Corp. NJR and Northwest Natural Holding Co. NWN.

Industry: Natural Gas - Distribution


The production of natural gas in the United States is likely to increase year over year in 2023 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, 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 Corp., NewJersey Resources Corp. and Northwest Natural Holding Co..

About the Industry

The shale revolution has substantially increased natural gas production. Its clean-burning nature is steadily boosting demand for natural gas from all customer groups. 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 pipelines.

Major concerns for the 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. Competition from other clean sources of energy can lower demand for natural gas, and consequently for pipelines. The expected contraction in U.S economic activity in fourth-quarter 2022 and first-quarter 2023 is a concern.

Factors Shaping the Future of the Gas Distribution Industry

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 the disruption of services. At present, natural gas distribution utilities provide services to over 80 million 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 in 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. Despite the efforts of utilities to upgrade pipelines, aging natural gas pipelines also resulted in a few accidents in 2022.

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 3.7% year over year to 98.13 billion cubic feet per day (Bcf/d) in 2022 and 2.3% year over year to 100.38 Bcf/d in 2023. EIA also expects U.S. natural gas consumption to increase 5.38% in 2022 to 88.42 Bcf/d due to higher consumption from all customer groups, while 2023 consumption is expected to drop by 3.4% to 85.40 Bcf/d due to the expectation of milder winter temperature and lower usage from the residential and commercial customer group.

EIA expects U.S. liquefied natural gas (LNG) export volumes to increase 8.6% year over year to 10.6 Bcf/d in 2022. The export volume was lower than expected due to an accident in the Freeport LNG Export Terminal. With the Freeport terminal resuming operation, EIA expects LNG export volumes to increase 15.6% to 12.25 Bcf/d in 2023.

Fresh Investments Create Demand: The clean-burning nature and wide availability across the United States is driving demand for natural gas. The distribution network will 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. Three new LNG export terminals being developed in the United States, there should be increased 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.

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 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 #196, which places it in the bottom 21% 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 bottom 50% of the Zacks-ranked industries is a result of a negative earnings outlook for the constituent companies in aggregate. Since 2021-end, earnings estimates have gone down by 1.5% to $3.89 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 7.8% in the same time frame, while the Utility sector and Zacks S&P 500 composite have declined 4% and 19.4%, respectively.

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 9.56X compared with the S&P 500's 11.54X and the sector's 21.17X. Over the past five years, the industry has traded as high as 13.7X, a low of 9.08X, and at the median of 10.35X.

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 #2 (Buy). The rest carry a Zacks Rank #3 (Hold). 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 1.4% to $8.76 per share over the past 60 days. The current dividend yield of SRE is 2.91%. In the past year, the stock has gained 21.8% compared with the industry's rally of 7.3%.  Its long-term earnings growth (three to five years) rate is pegged at 5.7%.

Atmos Energy: This Dallas, TX-based company is engaged in the regulated natural gas distribution and storage business. Atmos Energy is planning to invest $15 billion from fiscal 2023 through 2027, out of which more than 85% will be allocated to enhance the safety of the existing operations. The stock currently carries a Zacks Rank #3. The Zacks Consensus Estimate for ATO's fiscal 2023 earnings has moved 0.2% higher to $5.97 per share over the past 60 days. The current dividend yield of ATO is 2.61%. In the past year, the stock has gained 10.7%. The long-term earnings growth rate is pegged at 7.5%.

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-$1.4 billion in the fiscal 2023-2024 time period to strengthen its infrastructure. NJR's strategic investments to expand natural gas transmission and distribution pipelines will allow it to cater to increasing demand from its expanding customer base. The stock currently carries a Zacks Rank #3.

The Zacks Consensus Estimate for NJR's fiscal 2023 earnings has moved 0.4% higher to $2.47 per share over the past 60 days. The current dividend yield of NJR is 3.2%. In the past year, the stock has gained 20.3%. Its long-term earnings growth rate is pegged at 6%.

Northwest Natural Holding Co.: This Portland, OR-based, energy company supplies natural gas and water to customers in the United States. Northwest Natural Holding aims to invest nearly $1.4 billion in the 2022-2026 time frame to further strengthen its operations. The income of this utility is highly regulated and enjoys the benefit of an expanding customer base. The stock currently carries a Zacks Rank #2.

The Zacks Consensus Estimate for NWN's 2022 earnings has moved 1.2% higher to $2.55 per share over the past 60 days. The current dividend yield of NWN is 4.14%. The long-term earnings growth rate is pegged at 4.3%.

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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit  for information about the performance numbers displayed in this press release.

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Sempra Energy (SRE) : Free Stock Analysis Report

Atmos Energy Corporation (ATO) : Free Stock Analysis Report

Northwest Natural Gas Company (NWN) : Free Stock Analysis Report

NewJersey Resources Corporation (NJR) : Free Stock Analysis Report

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