Atmos Energy Corporation ATO, 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 2025. Steady investments and expanding infrastructure in crucial production regions should drive the performance of New Jersey Resources NJR and MDU Resources Group MDU.
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. The 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.
3 Factors Shaping the Future of the Gas Distribution Industry
Interest Rate Decline is a Tailwind: To maintain, upgrade and expand operations, utilities approach capital markets for loans. Multiple rate hikes by the Federal Reserve took the benchmark rate to the 5.25-5.50% range, adversely impacting utility operators. The U.S. Federal Reserve has finally lowered the benchmark rate by 100 basis points, bringing down rates to a range of 4.25-4.5%. More rate cuts are expected in 2025, and the capital-intensive domestic-focused utilities will benefit from the Fed’s decision to reduce interest rates. The drop in interest rates is a big positive for utility operators planning large investments in infrastructure upgrades.
Production and Export Volumes of Increase: The short-term energy outlook released by the U.S. Energy Information Administration (EIA) indicates that domestic dry natural gas production in 2025 will be higher than 2024 levels due to an increase in production volume in the Permian and Eagle Ford regions. EIA expects U.S. liquefied natural gas (LNG) export volumes in 2025 to improve by 16.7% year-over-year. So, the gas pipelines will have to play a crucial role in transporting natural gas to these 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 EIA, LNG export capacity is on track to more than double between 2024 and 2028, from 11.4 billion cubic feet per day (Bcf/d) in 2023 to 24.4 Bcf/d in 2028 if the projects start operating as per plan. 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. 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.
Zacks Industry Rank Indicates Strong Prospects
The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates strong near-term prospects. The Zacks Utility Gas Distribution industry — a 13-stock group within the broader Zacks Utilities sector — currently carries a Zacks Industry Rank #91, which places it in the top 36% of the 250 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than two to one.
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.
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.
Gas Distribution Industry Beats Sector but Lags S&P 500
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 18.9% in the said time frame compared with the Utility sector’s growth of 12.9%. The Zacks S&P 500 composite has gained 26.5% in the same time frame.
Price Performance (One Year)
Gas Distribution Industry Trading at a Discount
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 11.17X compared with the S&P 500’s 18.46X and the sector’s 14.89X. Over the past five years, the industry has traded at a high of 14.52X and a low of 9.1X, with a median of 10.32X.
Utility Gas Industry vs. S&P 500 (Past Five Years)
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Utility Gas Industry vs. Sector (Past Five Years)
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Gas Distribution Stocks to Watch
All three natural gas distribution stocks mentioned below currently carry a Zacks Rank #2 (Buy) each.
Atmos Energy: This Dallas, TX-based company is engaged in the regulated natural gas distribution and storage business. Atmos Energy invested $2.94 billion in fiscal 2024 and plans to invest $3.7 billion in fiscal 2025 to strengthen its infrastructure further and efficiently serve more customers. Courtesy of its widespread pipeline, the company can transport more than 8.4 billion cubic feet of renewable natural gas annually. It continues to replace old pipelines and provide reliable services to its expanding customer base.
The current dividend yield is 2.55%, better than the Zacks S&P 500 Composite’s yield of 1.57%. The Zacks Consensus Estimate for ATO’s fiscal 2025 and 2026 earnings has moved up 0.4% and 0.8%, respectively, over the past 90 days.
Price and Consensus: ATO
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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 expenditures in the range of $495-$675 million for fiscal 2025.
The current dividend yield is 3.94%. The Zacks Consensus Estimate for NJR’s fiscal 2025 and 2026 earnings has moved 7.3% and 2.9% higher, respectively, over the past 90 days.
Price and Consensus: NJR
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The current dividend yield is 2.89%. The Zacks Consensus Estimate for MDU’s 2024 and 2025 earnings per share has moved up 0.9% and 1.1%, respectively, in the past 60 days.
Price and Consensus: MDU
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Atmos Energy Corporation (ATO) : Free Stock Analysis Report
MDU Resources Group, Inc. (MDU) : Free Stock Analysis Report
NewJersey Resources Corporation (NJR) : Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
