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3 Gas Distribution Stocks to Buy From a Flourishing Industry
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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 network to provide natural gas services to customers. The rising demand for clean, burning natural gas will create more opportunities for natural gas distribution companies.
Atmos Energy Corporation (ATO - Free Report) , 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 2024-2025. Steady investments and expanding infrastructure in crucial production regions should drive the performance of National Fuel Gas Company (NFG - Free Report) and New Jersey Resources Corporation (NJR - Free Report) .
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. 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 & Export Volumes of Gas to Increase: The short-term energy outlook released by the U.S. Energy Information Administration (EIA) indicates that domestic dry natural gas production will remain similar to the 2023 levels in 2024 and increase 1.6% year over year to 105.2 billion cubic feet per day (Bcf/d) in 2025. EIA also forecasts gas consumption to increase 0.3% year over year to 89.4 Bcf/d in 2024. Export volumes are expected to increase in 2024 and 2025, providing relief to natural gas transporters. EIA expects U.S. liquefied natural gas (LNG) export volumes to increase 2% year over year to 12.2 Bcf/d in 2024 and exports to increase 18% to 14.3 Bcf/d in 2025. This indicates the need for more pipelines to send LNG to export terminals.
Fresh Investments Create Opportunities: The clean-burning nature and wide availability of natural gas across the United States are driving demand. At present, 187 million Americans use natural gas. The distribution network will continue to transport natural gas to all parts of the United States. With five 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 five new LNG projects will increase the combined export capacity by 9.7 Bcf/d by 2025. Per the American Gas Association report, one residential customer signs up for natural gas service every minute and 80 businesses add natural gas service each day. As production and demand for natural gas increase, more pipelines will be required to safely transfer the commodity to end-users. Per the report, natural gas utilities are investing $33 billion each year to increase the reliability of natural gas distribution and transmission systems, indicating the long-term growth potential of this space.
Likely Drop in Interest Rate to Act as a Tailwind: In order to maintain, upgrade and expand operations, utilities approach capital markets for loans. Utilities have been enjoying near-zero interest rates for the past few years. However, multiple rate hikes by the Federal Reserve took the benchmark rate to 5.25-5.50%, which impacted utility operators. However, in its last few meetings, the Fed did not increase the benchmark rate. In the recently concluded Fed meeting, interest rates were unchanged. Fed officials indicated that they would probably reduce the interest rates in September if the positive development continues. The likely drop in interest rates would be a positive for utility operators planning large investments in infrastructure upgrades and the addition of renewable sources of energy to produce electricity.
Zacks Industry Rank Indicates Bright Prospects
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates encouraging 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 #92, which places it in the top 37% of the 250 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 results from a positive earnings outlook for the constituent companies in aggregate. Since Apr 30, 2024, earnings estimates for 2024 have moved up 0.85%.
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
Industry Lags S&P 500 But Beats Sector
The Gas Distribution industry has underperformed the Zacks S&P 500 composite but outperformed its sector over the past year. The stocks in this industry have gained 4.3% in the said time frame compared with the Utility sector’s rise of 0.4%. The Zacks S&P 500 composite has gained 24.9% in the same 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 trading at a trailing 12-month EV/EBITDA of 10.17X compared with the S&P 500’s 19.88X and the sector’s 14.98X. Over the past five years, the industry has traded at a high of 14.3X, a low of 9.08X and a median of 10.29X.
Utility Gas Industry vs. S&P 500 (Past Five Years)
Utility Gas Industry vs. Sector (Past Five Years)
Gas Distribution Stocks to Bet On
One of the three natural gas distribution stocks mentioned below currently sports a Zacks Rank #1 (Strong Buy), and the remaining two carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
National Fuel Gas Company: This Williamsville, NY-based company is involved in the sale, distribution, storage and transportation of electricity and natural gas. National Fuel Gas expects a $885-$980 million capital expenditure for fiscal 2024. E&P capital expenditure is anticipated to be $525-$555 million in fiscal 2024. The planned investment will strengthen operations and assist the company in providing efficient services to its customers.
The current dividend yield is 3.53%, better than the Zacks S&P 500 composite’s yield of 1.56%. The Zacks Consensus Estimate for NFG’s fiscal 2024 earnings has moved 11.2% higher to $5.18 per share over the past 60 days. The stock currently sports a Zacks Rank #1.
Price and Consensus: NFG
Atmos Energy: This Dallas, TX-based company is engaged in the regulated natural gas distribution and storage business. Atmos Energy invested $2.8 billion in fiscal 2023 and plans to invest $3.1 billion in fiscal 2024 to strengthen its infrastructure further and efficiently serve more customers. Courtesy of its widespread pipeline, the company can transport more than 8 billion cubic feet of renewable natural gas annually. The company continues to replace old pipelines and provide reliable services to its expanding customer base.
The current dividend yield is 2.61%. The Zacks Consensus Estimate for ATO’s fiscal 2024 earnings has moved 0.9% higher to $6.72 per share over the past 60 days. The stock currently carries a Zacks Rank #2.
Price and Consensus: ATO
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 company expects capital investments of $619-$754 million and $578-$742 million for fiscal 2024 and 2025, respectively.
The current dividend yield is 3.65%. The Zacks Consensus Estimate for NJR’s fiscal 2024 earnings has moved 0.3% higher to $2.94 per share over the past 60 days. The stock currently carries a Zacks Rank #2.
Price and Consensus: NJR
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3 Gas Distribution Stocks to Buy From a Flourishing Industry
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 network to provide natural gas services to customers. The rising demand for clean, burning natural gas will create more opportunities for natural gas distribution companies.
Atmos Energy Corporation (ATO - Free Report) , 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 2024-2025. Steady investments and expanding infrastructure in crucial production regions should drive the performance of National Fuel Gas Company (NFG - Free Report) and New Jersey Resources Corporation (NJR - Free Report) .
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. 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 & Export Volumes of Gas to Increase: The short-term energy outlook released by the U.S. Energy Information Administration (EIA) indicates that domestic dry natural gas production will remain similar to the 2023 levels in 2024 and increase 1.6% year over year to 105.2 billion cubic feet per day (Bcf/d) in 2025. EIA also forecasts gas consumption to increase 0.3% year over year to 89.4 Bcf/d in 2024. Export volumes are expected to increase in 2024 and 2025, providing relief to natural gas transporters. EIA expects U.S. liquefied natural gas (LNG) export volumes to increase 2% year over year to 12.2 Bcf/d in 2024 and exports to increase 18% to 14.3 Bcf/d in 2025. This indicates the need for more pipelines to send LNG to export terminals.
Fresh Investments Create Opportunities: The clean-burning nature and wide availability of natural gas across the United States are driving demand. At present, 187 million Americans use natural gas. The distribution network will continue to transport natural gas to all parts of the United States. With five 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 five new LNG projects will increase the combined export capacity by 9.7 Bcf/d by 2025. Per the American Gas Association report, one residential customer signs up for natural gas service every minute and 80 businesses add natural gas service each day. As production and demand for natural gas increase, more pipelines will be required to safely transfer the commodity to end-users. Per the report, natural gas utilities are investing $33 billion each year to increase the reliability of natural gas distribution and transmission systems, indicating the long-term growth potential of this space.
Likely Drop in Interest Rate to Act as a Tailwind: In order to maintain, upgrade and expand operations, utilities approach capital markets for loans. Utilities have been enjoying near-zero interest rates for the past few years. However, multiple rate hikes by the Federal Reserve took the benchmark rate to 5.25-5.50%, which impacted utility operators. However, in its last few meetings, the Fed did not increase the benchmark rate. In the recently concluded Fed meeting, interest rates were unchanged. Fed officials indicated that they would probably reduce the interest rates in September if the positive development continues. The likely drop in interest rates would be a positive for utility operators planning large investments in infrastructure upgrades and the addition of renewable sources of energy to produce electricity.
Zacks Industry Rank Indicates Bright Prospects
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates encouraging 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 #92, which places it in the top 37% of the 250 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 results from a positive earnings outlook for the constituent companies in aggregate. Since Apr 30, 2024, earnings estimates for 2024 have moved up 0.85%.
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
Industry Lags S&P 500 But Beats Sector
The Gas Distribution industry has underperformed the Zacks S&P 500 composite but outperformed its sector over the past year. The stocks in this industry have gained 4.3% in the said time frame compared with the Utility sector’s rise of 0.4%. The Zacks S&P 500 composite has gained 24.9% in the same time frame.
One-Year Price Performance
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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 trading at a trailing 12-month EV/EBITDA of 10.17X compared with the S&P 500’s 19.88X and the sector’s 14.98X. Over the past five years, the industry has traded at a high of 14.3X, a low of 9.08X and a median of 10.29X.
Utility Gas Industry vs. S&P 500 (Past Five Years)
Utility Gas Industry vs. Sector (Past Five Years)
Gas Distribution Stocks to Bet On
One of the three natural gas distribution stocks mentioned below currently sports a Zacks Rank #1 (Strong Buy), and the remaining two carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
National Fuel Gas Company: This Williamsville, NY-based company is involved in the sale, distribution, storage and transportation of electricity and natural gas. National Fuel Gas expects a $885-$980 million capital expenditure for fiscal 2024. E&P capital expenditure is anticipated to be $525-$555 million in fiscal 2024. The planned investment will strengthen operations and assist the company in providing efficient services to its customers.
The current dividend yield is 3.53%, better than the Zacks S&P 500 composite’s yield of 1.56%. The Zacks Consensus Estimate for NFG’s fiscal 2024 earnings has moved 11.2% higher to $5.18 per share over the past 60 days. The stock currently sports a Zacks Rank #1.
Price and Consensus: NFG
Atmos Energy: This Dallas, TX-based company is engaged in the regulated natural gas distribution and storage business. Atmos Energy invested $2.8 billion in fiscal 2023 and plans to invest $3.1 billion in fiscal 2024 to strengthen its infrastructure further and efficiently serve more customers. Courtesy of its widespread pipeline, the company can transport more than 8 billion cubic feet of renewable natural gas annually. The company continues to replace old pipelines and provide reliable services to its expanding customer base.
The current dividend yield is 2.61%. The Zacks Consensus Estimate for ATO’s fiscal 2024 earnings has moved 0.9% higher to $6.72 per share over the past 60 days. The stock currently carries a Zacks Rank #2.
Price and Consensus: ATO
The current dividend yield is 3.65%. The Zacks Consensus Estimate for NJR’s fiscal 2024 earnings has moved 0.3% higher to $2.94 per share over the past 60 days. The stock currently carries a Zacks Rank #2.
Price and Consensus: NJR