On Jul 3, 2013, we retained our Underperform recommendation on
energy services holding company
AGL Resources Inc.
). Our investment thesis is supported by a Zacks Rank #4 (Sell).
Why the Reiteration?
We expect shareholder sentiment towards the company to remain
lukewarm, considering its investment in higher-risk unregulated
operations, ongoing regulatory uncertainties and the challenging
economic environment. AGL Resources' earnings are likely to
suffer in 2013 due to a less-than-favorable outlook at its
wholesale segment. Additionally, inclusion of the shipping
operations (post Nicor acquisition) has left AGL Resources with a
weak business, thereby heightening its risk profile.
Causes for Concern
The outlook for AGL Resources' wholesale segment continues to be
less than favorable. We believe that margins in this unit will be
under pressure, based on narrow spreads for transportation and
During the next few quarters, AGL Resources' shipping segment
results may also remain weak. The absence of a strong economic
recovery in the U.S. continues to have a negative impact on
tourism and the economies in Tropical Shipping's service
territories (particularly in the Bahamas and the Caribbean).
Natural gas distribution is usually a temperature-sensitive
business with about half of all deliveries used for space
heating. Usually, almost 75% of the deliveries and sales occur
during the six-month period of October through March.
Consequently, milder-than-normal weather conditions in the future
could adversely effect AGL Resources' operating results, cash
flow and financial condition.
Stocks That Warrant a Look
While we expect AGL Resources to perform below its peers and
industry levels in the coming months and see little reason for
investors to own the stock, one can look at
Atmos Energy Corp.
National Fuel Gas Co.
) as good buying opportunities. These natural gas distributors -
sporting a Zacks Rank #2 (Buy) - have solid secular growth
stories with potential to rise from current levels.
ATMOS ENERGY CP (ATO): Free Stock Analysis
AGL RESOURCES (GAS): Free Stock Analysis
NATL FUEL GAS (NFG): Free Stock Analysis
QUESTAR (STR): Free Stock Analysis Report
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