We have maintained our Underperform recommendation on energy
services holding company
AGL Resources Inc.
) considering its weak fundamentals and tepid outlook. The
disappointing first quarter results and a number of other
challenges have added to this bearishness.
Founded in 1856, Atlanta, Georgia-based AGL is an energy
services holding company whose principal business is gas
distribution. Following the December 2011 acquisition of
Naperville, Illinois-based Nicor Inc., AGL Resources has become the
largest domestic natural gas-only distribution entity with about
4.5 million customers across seven states.
Through its seven utilities the company builds, manages and
maintains intrastate natural gas pipelines, distribution facilities
and peaking and storage facilities. Additionally, AGL Resources
responds to and repairs gas leaks and other requirements for
service and also takes meter reading. Apart from the core
distribution operations, AGL Resources is also engaged in other
activities that include: Retail Operations, Wholesale Services,
Midstream Operations, Energy Services, Cargo Shipping and Liquefied
Natural Gas (LNG) & Propane.
AGL Resources recently reported lower-than-expected EPS for the
March quarter - $1.16 versus the Zacks Consensus Estimate of $1.32
- adversely affected by warm weather and higher operating
We expect shareholder sentiment towards the company to remain
lukewarm, considering its investment in higher-risk unregulated
operations, ongoing regulatory uncertainties and the challenging
AGL's earnings are likely to suffer in 2012 due to a
less-than-favorable outlook at its wholesale segment. The company,
which competes on a large scale with gas distributors like
Atmos Energy Corp.
), expects margins at this unit to be under pressure in the
foreseeable future due to the narrowing transportation/storage
Results of the shipping segment are also likely to remain weak
over the next few quarters, as the challenging economic environment
in the U.S. continues to have a negative impact on tourism and the
economies in its service territories.
Given these concerns, we expect AGL to perform below its peers
and industry levels in the coming months. As such, we see little
reason for investors to own the stock. Partially offsetting these
negatives are the company's large and stable customer profile,
consistent dividend growth and strong liquidity position.
Our continued long-term bearish investment thesis is supported
by a Zacks #4 Rank (short-term Sell rating).
ATMOS ENERGY CP (ATO): Free Stock Analysis
AGL RESOURCES (GAS): Free Stock Analysis Report
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