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:
- Per the U.S. Energy Information Administration’s (EIA) recent short-term energy outlook release, residential demand for natural gas continued to improve in the month of March and April so far, primarily due to space heating demand. People are staying at home to follow social distancing guidelines to counter the challenges posed by the novel coronavirus pandemic. The distribution pipelines spread across the United States will play a major role in ensuring the supply of natural gas to millions of households in the country.
- The existing United States natural gas distribution pipelines are aging and 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. To lower possibility of interruption in services, the Department of Energy announced $38.5 million funding for a program that will promote the development of new technologies to strengthen cast iron and bare steel natural gas distribution pipes by creating a new pipe inside the old pipe. The Rapid Encapsulation of Pipelines Avoiding Intensive Replacement (REPAIR) program will ensure 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, incidentally at present pipe excavation and replacement costs range of 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.
- The Environmental Protection Agency (EPA) through its Inventory of U.S. Greenhouse Gas Emissions and Sinks release clearly indicated that annual emissions from the natural gas distribution system declined 73% over the 1990 to 2018 time period. Currently, the natural gas distribution systems owned and operated by local natural gas utilities emit only 0.08% of produced natural gas. Natural gas is preferred over other fossil fuel sources due to its clean burning nature and its abundance in the United States. To cater to increasing demand, more natural gas pipelines projects have been planned and are presently under construction and were scheduled to be completed in 2020. The COVID-19 pandemic has jeopardized many construction schedules as the companies are trying to preserve liquidity and delay capital projects. Per the EIA release, dry natural gas production in the United States in 2020 will average 91.7 billion cubic feet per day (Bcf/d), marking a 0.5% decrease from 2019. However, the U.S. economic stimulus package and development of a vaccine could bring back things to pre-pandemic state within the next few months.
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 14-stock group within the broader Zacks Utilities sector — currently carries a Zacks Industry Rank #37, which places it in the top 15% 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 Lags S&P 500 & Sector
The Gas Distribution industry has underperformed the Zacks S&P 500 composite and its own sector over the past year. The stocks in this industry have collectively lost 17.3% in the past year, while the Utility sector has declined 12.8%. The Zacks S&P 500 composite has gained 0.4% in the said time frame.
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 12.1X compared with the S&P 500’s 10.51X and the sector’s 16.79X. Over the past five years, the industry has traded as high as 14.76X, low of 7.66X and at the median of 11.08X.
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. In addition, the outbreak of COVID-19 have forced utilities to delay or shelve their capital projects till the economic condition improves.
Low interest rates will definitely assist natural gas pipeline operators in funding expansion projects but the drop in demand from commercial and industrial sectors will force them to go slow on new projects.
Gas Distribution Stocks in Focus
Below are four stocks that have been witnessing positive earnings estimate revisions. Of these, two sport a Zacks Rank #1 (Strong Buy) and the remaining two 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 Zacks Consensus Estimate for this Zacks Rank #1, Dallas TX-based gas distribution, pipeline and storage company has moved 0.2% higher to $4.70 for the current year over the past 60 days. In the past 12 months, the stock has gained 14%.
Price and Consensus: ATO
Chesapeake Utilities Corporation (CPK): This Zacks Rank #1, Dover, DE -based company is involved in regulated and unregulated energy businesses. Its 2020 consensus EPS estimate has moved up 2.03% higher to $4.01 in the past 60 days. In the past 12 months, the stock has gained 2.7%.
Price and Consensus: CPK
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 dropped marginally for the current year but has moved 0.3% higher to $7.82 for 2021 over the past 60 days. In the past 12 months, this Zacks Rank #3 stock has gained 2.3%.
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 drop marginally for the current year but move 0.8% higher to $3.83 for the 2021 over the past 60 days. The Zacks Rank #3 stock has gained 5.4% in the past 12 months.
Price and Consensus: OGS
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