Natural gas distribution companies offer services to transport natural gas from the region of production to millions of consumers across the United States. The utilities under the Zacks Utility Gas Distribution industry control miles of underground pipeline networks to provide natural gas services to customers. The rising demand for clean, burning natural gas will create more opportunities for natural gas distribution companies. Demand for natural gas generally increases during the winter for space heating and during the summer for electricity generation needed for air conditioning.
Atmos Energy Corporation ATO, with its widespread transmission and distribution lines, interstate pipelines and significant investments in infrastructure development projects, is poised to benefit as natural gas production volumes are expected to increase in 2025. Steady investments and expanding infrastructure in crucial production regions are expected to drive the performance of Southwest Gas Corporation SWX, New Jersey Resources Corporation NJR and Chesapeake Utilities CPK.
About the Industry
The shale revolution has substantially increased natural gas production. Its clean-burning nature has steadily boosted the demand for natural gas from all customer groups. Natural gas distribution pipelines are vital in delivering natural gas from intrastate and interstate transmission pipelines to consumers through small-diameter pipelines. The United States has 3,353 trillion cubic feet of natural gas, and a natural gas pipeline network of 2.6 million miles is utilized to distribute gas to customers. Major concerns for the industry are aging infrastructure and rising investment costs required to upgrade and maintain the vast network of pipelines due to the hike in interest rates. Competition from other clean energy sources can lower the demand for natural gas and, consequently, for pipelines.
Factors Shaping the Future of the Gas Distribution Industry
Production and Export Volumes of Increase: The short-term energy outlook released by the U.S. Energy Information Administration (EIA) indicates that domestic dry natural gas production in 2025 will be higher than 2024 levels due to an increase in production volume in the Permian and Eagle Ford regions. EIA expects U.S. liquefied natural gas (LNG) export volumes in 2025 to improve 16.7% year over year. In 2026, LNG export volumes in expected to increase 14.2% year over year. Therefore, the gas pipelines will play a crucial role in transporting natural gas to these export terminals.
Interest Rate Decline is a Tailwind: To maintain, upgrade and expand operations, utilities approach capital markets for loans. Multiple rate hikes by the Federal Reserve took the benchmark rate to the 5.25-5.50% range, adversely impacting utility operators. The U.S. Federal Reserve has finally lowered the benchmark rate by 100 basis points, bringing down rates to a range of 4.25-4.5%. More rate cuts are expected in 2025, and the capital-intensive domestic-focused utilities will benefit from the Fed’s decision to reduce interest rates. The drop in interest rates is a big positive for utility operators planning large investments in infrastructure upgrades.
Fresh Investments Create Opportunities: The clean-burning nature and wide availability of natural gas across the United States are driving demand. At present, 189 million Americans use natural gas. The distribution network will continue to transport natural gas to all parts of the United States. Per the American Gas Association report, one residential customer signs up for natural gas service every minute, and 60 businesses add natural gas service each day. Per the report, natural gas utilities are investing $37 billion each year to increase the reliability of natural gas distribution and transmission systems, indicating the long-term growth potential of this space.
Zacks Industry Rank Indicates Strong Prospects
The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates strong near-term prospects. The Zacks Utility Gas Distribution industry — a 13-stock group within the broader Zacks Utilities sector — currently carries a Zacks Industry Rank #57, which places it in the top 23% of the 245 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than two to one.
The industry’s positioning in the top 50% of the Zacks-ranked industries results from a 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 us look at the industry’s recent stock-market performance and valuation picture.
Gas Distribution Industry Beats S&P 500 but Lags Sector
The Gas Distribution industry has outperformed the Zacks S&P 500 composite but underperformed its sector over the past year. The stocks in this industry have gained 11.2% in the said time frame compared with the Utility sector’s growth of 15%. The Zacks S&P 500 composite has gained 8.6% in the same time frame.
Price Performance (One Year)
Gas Distribution Industry Trading at a Discount
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 trading at a trailing 12-month EV/EBITDA of 10.41X compared with the S&P 500’s 16.63X and the sector’s 15.65X. Over the past five years, the industry has traded at a high of 11.98X and a low of 9.11X, with a median of 10.3X.
Utility Gas Industry vs. S&P 500 (Past Five Years)
Utility Gas Industry vs. Sector (Past Five Years)
Gas Distribution Stocks to Add to Your Portfolio
All four natural gas distribution stocks mentioned below currently carry a Zacks Rank #2 (Buy) each. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Atmos Energy: This Dallas, TX-based company is engaged in the regulated natural gas distribution and storage business. Atmos Energy invested $2.94 billion in fiscal 2024 and plans to invest $3.7 billion in fiscal 2025 to strengthen its infrastructure further and efficiently serve more customers. It continues to replace old pipelines and provide reliable services to its expanding customer base.
The current dividend yield is 2.25%, better than the Zacks S&P 500 Composite’s yield of 1.59%. The Zacks Consensus Estimate for ATO’s fiscal 2025 and 2026 earnings has moved up 0.2% and 0.4%, respectively, over the past 90 days.
Price and Consensus: ATO
Southwest Gas Corporation: This Las Vegas-based company provides regulated gas distribution and transmission services to its customers. Southwest Gas has plans to invest $4.3 billion in the 2025-2029 period. SWX’s natural gas operations have a diversified and growing customer base in three states, namely Arizona, Nevada and California.
The current dividend yield is 3.45%. The Zacks Consensus Estimate for SWX’s 2025 and 2026 earnings has moved up 1.1% and 3.5%, respectively, over the past 90 days.
Price and Consensus: SWX
New Jersey Resources: This Wall, NJ-based company provides reliable energy services to its expanding customer base. Given its earnings growth opportunities and strong return on equity, NJR makes for a solid investment option in the utility sector. New Jersey Resources makes consistent investments to upgrade and maintain its existing infrastructure.
The current dividend yield is 3.67%. The Zacks Consensus Estimate for NJR’s fiscal 2025 earnings has moved 1.6%, and fiscal 2026 estimates remained the same over the past 90 days.
Price and Consensus: NJR
Chesapeake Utilities Corporation: This Dover, DE-based company operates as an energy delivery company. Chesapeake Utilities, with its diversified geographical exposure and multiple sources of organic and inorganic assets, has increased dividends in 29 out of the last 31 years. In the long term, the company plans to invest in the range of $1.5-$1.8 billion in a five-year period to strengthen its existing operation.
The current dividend yield is 2.56%. The Zacks Consensus Estimate for CPK’s 2025 and 2026 earnings has moved 0.3% and 0.3%, respectively, over the past 90 days.
Price and Consensus: CPK
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