US natural gas production is likely to increase year by year in 2022 according to the latest report from the US Energy Information Administration (“EIA”) and continue to drive shares in the Zacks Utility gas distribution industry. Distribution companies provide services to transport natural gas from the production area to millions of consumers throughout the United States.
Simbra Energy SRE, with its extensive 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 infrastructure expansion in key production areas should drive performance Atmos Energy Company ATO, National Fuel Gas Company NFG and New Jersey Resources Corporation NJR.
about the industry
The shale oil revolution has dramatically increased natural gas production. The clean-burning nature is steadily increasing the demand for natural gas in the electric, industrial, commercial and residential energy markets. Natural gas distribution pipelines play a vital role in delivering natural gas from intrastate and interstate transportation pipelines to consumers via small diameter pipelines. The US natural gas network has nearly 3 million miles of pipeline that ensures a steady supply to millions of customers. The distribution industry’s concerns are obsolescence of infrastructure and increased investment costs required to modernize and maintain the extensive network of pipelines due to rising interest rates. In addition, competition from other clean energy sources can reduce demand for natural gas, and thus lower demand for pipelines.
Factors shaping the future of the gas distribution industry
aging distribution infrastructure: Existing natural gas distribution pipelines in the United States are obsolete. Leaks or breaks in cast iron and bare steel pipelines may disrupt services. Currently, natural gas distribution facilities serve more than 75 million residential and 5 million commercial customers in the United States. According to a report by the Business Roundtable, it will cost approximately $270 billion to replace the legacy pipelines. To reduce the potential for outages in services, the Department of Energy has announced $33 million in funding for 10 projects involved in retrofitting natural gas pipelines to rehabilitate existing cast iron and bare steel pipes. Rapid pipeline encapsulation will ensure that an extensive replacement or repair program is avoided, a minimum extending the service life of distribution pipelines by 50 years and reducing the cost of replacing old pipelines by approximately 10-20 times per mile. At present, the costs of digging and replacing pipes can be as high as $10 million per mile. Higher interest rates will increase the overall cost of project financing for the utilities compared to what these companies have enjoyed in the past two years.
Increasing the volume of gas production and export: Recent short-term energy forecasts from the EIA show domestic dry natural gas production will grow 3.4% YoY to 96.7 billion cubic feet per day (Bcf/d) in 2022 and 5.2% YoY to 101.7 Bcf/d in 2023. The EIA also expects US natural gas consumption to rise 3% in 2022 to 85.7 billion cubic feet per day due to higher consumption from all customer groups, while 2023 consumption is expected to decline to 85.3 billion cubic feet per day due to a mild winter forecast. Temperature and low consumption of residential and commercial customer group. The EIA expects US LNG export volumes to increase 23% year-over-year to 12 billion cubic feet per day in 2022. With no new LNG export facilities expected to start soon, the EIA expects an increase The volume of LNG exports will increase by 5% to 12.6 billion cubic feet per day in 2023. The higher production and export volumes will certainly increase the use and demand of natural gas pipelines in the United States.
Scope of new investments: The clean-burning nature and wide availability throughout the United States is driving up demand for natural gas. The distribution network must continue to play a major role in transporting natural gas to nearly 75 million customers across the United States. Demand from the growing volume of natural gas customers and the use of natural gas to produce electricity will play a pivotal role in the gradual shift of utilities towards clean energy. With increased production and demand for natural gas, more pipelines will be required to safely transport natural gas to end users, which will create new growth opportunities for natural gas pipeline operators.
Zacks Industry Ranking Points to Dim Prospects
The group’s Zacks Industry Rating, which essentially represents the Zacks average rating of all member stocks, points to bleak near-term prospects.
The Zacks Utility Gas Distribution Industry—a group of 15 stocks within the Zacks Utility sector—currently ranks Zacks Industry Rating #159, placing it in the lowest 37% of the 252 Zacks industries. Our research shows that the top 50% of industries ranked by Zacks outperform the bottom 50% by a factor of more than 2 to 1.
The industry’s position in the bottom 50% of industries ranked on Zacks is a result of negative earnings expectations for the component companies in aggregate. Since January 2022, earnings estimates are down 1% to $3.91 per share.
Before we introduce a few of the gas distribution stocks you might want to consider for your portfolio, let’s take a look at stock market performance and a recent valuation picture of the industry.
Industry outperforms the S&P 500 and the sector
The gas distribution industry has outperformed the Zacks S&P 500 compound and segment over the past year. Stocks in the industry combined returned 13.2% in the same time frame, while the utilities sector gained 9.3%. The Zacks S&P 500 Composite Index is down 2.5% in the cited period.
Price performance for a year
Current evaluation of the gas distribution industry
Because utility companies have a lot of debt on their balance sheets, the EV/EBITDA ratio (the enterprise’s value/earnings before interest tax is depreciated and amortized) is commonly used to evaluate it.
The industry is currently trading at a 12-month lagged EV/EBITDA of 10.63 times compared to the S&P 500 at 13.12X and 18.32 times for the sector. Over the past five years, the industry has traded up to 13.7X, a 9.58X, and an average of 10.8X.
Utility Gas Industry vs. S&P 500 (Past Five Years)
Utility Gas Industry vs. Sector (Past Five Years)
4 gas distribution stores to keep close watch
Here are four stocks that have seen positive reviews of earnings estimates. Only one of the four natural gas distribution stocks listed below currently holds a Zacks #2 (buy) rating. The rest holds Zacks #3 (Hold) rank.
you can see The full list of Zacks #1 stocks (strong buy) today is here.
Simbra EnergySan Diego, California: This energy services holding company is engaged in the sale, distribution, storage, and transmission of electricity and natural gas. Sempra Energy plans to invest $36 billion in the 2022-2026 time frame to strengthen its operating, transmission and distribution infrastructure. Global LNG demand growth continues to rise, Sempra Energy is well positioned with opportunities with strategic locations in North America. The stock currently has a Zacks #2 rating.
Zacks consensus estimate of SRE earnings for 2022 is up 0.6% to $8.48 per share over the past 60 days. The current dividend yield for the SRE is 2.75%. In the past six months, the stock is up 33.9% compared to the industry’s 26% rise. Its long-term earnings growth rate (three to five years) is pegged at 5.6%.
Price and consensus: SRE
Atmos Energy: This Dallas, Texas based company is engaged in the distribution and storage of natural gas. Atmos Energy plans to invest in a range of $13-14 billion from fiscal year 2022 through 2026, more than 80% of which will be dedicated to enhancing the integrity of existing operations. The stock currently has a Zacks rating of #3.
Zacks consensus estimate for ATO’s financials for 2022 is up 0.2% to $5.52 per share over the past 60 days. The current dividend yield for the ATO is 2.31%. In the past three months, the stock has risen 28.3%. The long-term earnings growth rate is held at 7.3%.
Price and consensus: ATO
National Fuel Gas Company The New York-based Williamsville Integrated Energy Corporation has natural gas assets located in the prolific Appalachian Basin and oil-producing assets in California. The presence of the National Fuel Gas Company across the natural gas value chain through exploration, production, refining and refining activities gives it a competitive advantage and allows it to reduce operating costs. NFG has more than $500 million in investments planned over the next five years to modernize its pipelines and distribution systems. The stock currently has a Zacks rating of #3.
Zacks consensus estimate for NFG’s financials for 2022 earnings has increased 2.5% to $5.68 per share over the past 60 days. NFG’s current dividend yield is 2.45%. In the past six months, the stock is up 22.1%. The long-term earnings growth rate is held at 10%.
Price and consensus: NFG
New Jersey ResourcesHeadquartered in Wall, NJ, this company provides regulated gas distribution, retail and wholesale energy services to its customers. New Jersey Resources plans to invest $1.1-1.4 billion in the 2022-2023 fiscal period to strengthen its infrastructure. Strategic investments will allow NJR to expand its natural gas transmission and distribution lines to meet growing customer demand. The stock currently has a Zacks rating of #3.
Zacks Consensus’ estimate of NJR’s fiscal 2022 earnings has increased 3.5% to $2.36 per share over the past 60 days. The current dividend yield for NJR is 3.13%. In the past six months, the stock has risen 20.3%. Its long-term earnings growth rate is held at 6%.
Price and consensus: NJR
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