Production of natural gas in the United States is likely to increase year over year in 2022 per the latest report by the U.S. Energy Information Administration (“EIA”) and continue driving stocks in the Zacks Utility Gas Distribution industry. Despite the uncertainty caused by the Omicron variant, U.S. demand for natural gas is expected to remain stable in 2022. Higher demand in Europe and Asia should increase the U.S. natural gas export volumes. These distribution companies offer services to transport natural gas from the region of production to millions of consumers across the United States.
Sempra Energy SRE, 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 Corporation ATO, National Fuel Gas Company NFG and NewJersey Resources Corporation NJR.
About the Industry
The shale revolution has substantially increased natural gas production. Its clean-burning nature is steadily boosting demand for natural gas in the electric power, industrial, commercial and residential markets. 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 pipeline that ensures steady supply to millions of customers across the United States. The primary concern for the distribution industry is aging infrastructure and substantial investment is required to upgrade and maintain the vast network of pipelines. In addition, competition from other clean sources of energy can lower demand for natural gas, consequently pushing down demand for pipelines.
Factors Shaping the Future of the Gas Distribution Industry
Production and Export Volumes of Gas to Increase: The recent short-term energy outlook released by the EIA indicates that domestic dry natural gas production will grow 2.7% to a record-high 96.0 billion cubic feet per day (Bcf/d) in 2022 and to 97.6 Bcf/d in 2023. EIA also expects annual U.S. natural gas consumption to remain relatively unchanged in 2022 and increase slightly in 2023 due to higher usage of natural gas in the industrial sector. Higher demand for natural gas in Europe and Asia will result in increase in gas exports volumes both by pipeline to Mexico and Canada and in the form of liquefied natural gas (LNG) to overseas destinations. EIA expects U.S. LNG export volumes to increase to 11.5 Bcf/d in 2022 and 12.1 Bcf/d in 2023 from 9.8 Bcf/d in 2021. The higher production and export volumes will definitely increase usage and demand for the of natural gas pipelines in the United States.
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 disruption of services. At present, natural gas distribution utilities provide services to over 75 million residential and 5 million commercial 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 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 current near-zero interest rate will assist utilities in sourcing funds for their capital projects at a cheaper rate.
Scope for Fresh Investments: The clean-burning nature and wide availability across the United States are driving the demand for natural gas. Temporary obstacles like the outbreak of COVID-19 or price increases should not dampen the long-term prospects of natural gas. Hence, the distribution network should continue to play a major role in transporting natural gas to nearly 77.3 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. Natural gas will play a major role in the Federal government’s aim to reach net-zero emission by 2050 and as the demand for natural gas increases, it will also create new opportunities for the natural gas pipeline operators.
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 strong near-term prospects.
The Zacks Utility Gas Distribution industry — a 16-stock group within the broader Zacks Utilities sector — currently carries a Zacks Industry Rank #78, which places it in the top 31% of the 254 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 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’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Beats &P 500 and Sector
The Gas Distribution industry has outperformed the Zacks S&P 500 composite of its own sector over the past year. The stocks in this industry have collectively returned 17.1% in the same time frame, while the Utility sector has gained 3.3%. The Zacks S&P 500 composite has gained 15.2% in the said 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 a trailing 12-month EV/EBITDA of 11.4X compared with the S&P 500’s 14.58X and the sector’s 15.75X. Over the past five years, the industry has traded as high as 14.97X, a low of 9.95X, and at the median of 12.46X.
Utility Gas Industry vs S&P 500 ( Past 5 yrs)
Utility Gas Industry vs Sector( Past 5 yrs)
4 Gas Distribution Stocks to Keep a Close Watch On
Below are four stocks that have been witnessing positive earnings estimate revisions and have returned higher than its industry in the past three months. Two out the four natural gas distribution stocks mentioned below presently carry a Zacks Rank #2 (Buy) and two 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 $15 billion in the 2022-2026 time frame to strengthen its 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 2021 earnings has moved up 0.1% to $8.44 per share over the past 90 days. The current dividend yield of SRE is 3.29%. In the past three months, the stock has gained 3.7% against its industry’s decline of 0.2%. Its long-term earnings growth (three to five years) rate is pegged at 5.3%.
Price and Consensus: SRE
Atmos Energy Corporation: This Dallas, TX-based company is engaged in the regulated natural gas distribution and storage business. Atmos Energy is planning to invest in the range of $13-$14 billion from fiscal 2022 through 2026, out of which more than 80% will be allocated to enhance the safety of the existing operations. More than 90% of Atmos Energy’s annual capital investments starts earning returns within six months and nearly 99% in no more than 12 months. The stock currently carries a Zacks Rank #2.
The Zacks Consensus Estimate for ATO’s fiscal 2022 earnings has moved 1.7% higher to $5.52 per share over the past 90 days. The current dividend yield of ATO is 2.62%. In the past three months, the stock has gained 11.5%. The long-term earnings growth rate is pegged at 8%.
Price and Consensus: ATO
National Fuel Gas Company : This Williamsville, NY-based, integrated energy company has natural gas assets located in the prolific Appalachian basin and oil-producing assets in California. National Fuel Gas Company’s presence across the natural gas value chain through Upstream, Midstream and Downstream activities gives it a competitive advantage and allows it to lower operating costs. NFG has more than $500 million investment planned over the next five years for modernization of pipeline transportation and distribution systems. The stock currently carries a Zacks Rank #3.
The Zacks Consensus Estimate for the NFG’s fiscal 2022 earnings has moved 0.9% higher to $5.34 per share over the past 60 days. The current dividend yield of NFG is 3.06%. In the past three months, the stock has gained 2.3%. The long-term earnings growth rate is pegged at 5.41%.
Price and Consensus: NFG
New Jersey Resources Corporation: 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 $1.3-$1.5 billion in the fiscal 2022-2023 time period to strengthen its infrastructure. NJR’s strategic investments to expand natural gas transmission and distribution pipelines will allow it cater to the demand of the expanding customer base. The stock currently carries a Zacks Rank #2.
The Zacks Consensus Estimate for NJR’s fiscal 2022 earnings has moved 0.5% higher to $2.27 per share over the past 90 days. The current dividend yield of NJR is 3.75%. In the past three months, the stock has gained 3.6%. Its long-term earnings growth rate is pegged at 7.1%.
Price and Consensus: NJR
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