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Zacks Industry Outlook Highlights Sempra Energy, Atmos Energy, Southwest Gas and MDU Resources

For Immediate Release

Chicago, IL – November 20, 2023 – Today, Zacks Equity Research discusses Sempra Energy SRE, Atmos Energy Corp. ATO, Southwest Gas Holdings, Inc. SWX and MDU Resources Group MDU.

Industry: Utilities - Gas

Link: https://www.zacks.com/commentary/2185913/4-gas-distribution-stocks-to-watch-in-a-prospering-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.

Sempra Energy, with its widespread transmission and distribution lines and interstate pipelines, and significant investments in infrastructure development projects, is poised to benefit as natural gas production volumes are expected to increase in the 2023-2024 time frame. Steady investments and expanding infrastructure in crucial production regions should drive the performance of Atmos Energy Corp., Southwest Gas Holdings, Inc. and MDU Resources Group.

About the Industry

The shale revolution has substantially increased natural gas production. Its clean-burning nature steadily boosts 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 natural gas network in the United States has nearly 2.3 million miles of underground distribution pipelines. 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 demand for natural gas and, consequently, for pipelines.

Factors Shaping the Future of the Gas Distribution Industry

Production and Export Volumes of Gas to Increase: The short-term energy outlook released by the EIA indicates that domestic dry natural gas production will grow to 105 billion cubic feet per day (Bcf/d) in the second half of 2023, increasing nearly 2 Bcf/d from the first half of 2023. Natural gas production is expected to increase 1.35% year over year to 105.1 Bcf/d in 2024. The increase in gas production volumes has improved from earlier forecasts of the EIA due to strong volumes from the Permian region.

Export volumes are expected to increase in 2023 and 2024, providing much relief to natural gas transporters. The EIA expects U.S. gross liquefied natural gas (LNG) export volumes to increase nearly 11.3% year over year to 11.8 Bcf/d in 2023, and exports are expected to increase 4.2% to 12.3 Bcf/d in 2024. Per Playbook.AGA.org, the United States will reach a peak export capacity of 20 Bcf/d by 2025. This indicates the need for more pipelines to send LNG to export terminals.

Fresh Investments Create Demand: The clean-burning nature and wide availability across the United States are driving demand for natural gas. The distribution network will continue to transport natural gas to nearly 75 million customers in all parts of the United States. With three 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 the EIA, once completed, the three new LNG projects will increase the combined export capacity by 5.7 Bcf/d by 2025. Per Playbook.AGA.org, 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.

Aging Distribution Infrastructure: The existing U.S. natural gas distribution pipelines are aging. Leakage or breakage in these old cast iron and bare steel pipelines may disrupt services. Natural gas distribution utilities currently provide services to over 80 million customers in the United States. Per a report from Business Roundtable, replacing the old pipelines will cost around $270 billion. Per Playbook.Aga.org, natural gas utilities invest nearly $32 billion each year to improve the distribution network's safety.

To lower the possibility of service interruption, the Department of Energy announced $33 million in funding for ten projects involved in natural gas pipeline retrofitting to rehabilitate existing cast iron and bare steel pipes. The Rapid Encapsulation of Pipelines Avoiding Intensive Replacement or the REPAIR program will ensure the minimum extension of the service life of distribution pipelines by 50 years and lower the replacement cost of old pipelines by nearly 10 to 20 times per mile. Currently, pipe excavation and replacement costs can go up to $10 million per mile. The rising interest rates will increase the overall project financing cost for the utilities compared with what these companies have enjoyed in the past two years.

Zacks Industry Rank Indicates Strong Prospects

The group's Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates dull 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 #37, which places it in the top 15% 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 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 Aug 31, 2023, earnings estimates have gone down by 5.9% to $3.40 per share.

Before we present a few Gas Distribution stocks that you may want to consider for your portfolio, let's look at the industry's recent stock-market performance and valuation picture.

Industry Lags Sector and S&P 500

The Gas Distribution industry has lost more than the sector and underperformed the Zacks S&P 500 composite over the past year. The stocks in this industry have collectively lost 15.1% in the same time frame compared with the Utility sector's fall of 9.6%. The Zacks S&P 500 composite has gained 14.3% in the same time frame.

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 9.87X compared with the S&P 500's 13.06X and the sector's 16.88X. Over the past five years, the industry traded at a high of 15.46X, a low of 9.05X, and a median of 10.55X.

4 Gas Distribution Stocks to Keep a Close Watch On

Below are four stocks that have been witnessing positive earnings estimate revisions. One out of the four natural gas distribution stocks mentioned presently sports a Zacks Rank #1 (Strong Buy), and another carries Rank #2 (Buy). The other two carry a Zacks Rank #3 (Hold). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

Southwest Gas Corporation: This Las Vegas, NV-based company provides regulated gas distribution and transmission services to its customers. Southwest Gas has plans to invest $2 billion in the 2023-2025 period. SWX's natural gas operations have a diversified and growing customer base in three states, namely Arizona, Nevada and California. The stock currently sports a Zacks Rank #1. The Zacks Consensus Estimate for SWX's 2023 earnings has moved 3.3% higher to $3.49 per share over the past 60 days.

Sempra Energy: This San Diego, CA-based company efficiently serves a population of 21.1 million. In the period from 2023-2026, the company aims to invest $40 billion to strengthen its existing operations. The company continues to gain from economic improvement in its service territories, resulting in new customer additions and growth in demand. The stock currently carries a Zacks Rank #2. The Zacks Consensus Estimate for SRE's 2023 earnings has moved 0.9% higher to $4.52 per share over the past 60 days.

Atmos Energy Corporation: 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 has plans to invest $2.9 billion in fiscal 2024 to strengthen its infrastructure further and efficiently serve more customers. The company continues to replace old pipelines and provide reliable services to its expanding customer base. The stock currently carries a Zacks Rank #3. The Zacks Consensus Estimate for ATO's fiscal 2024 earnings has moved 0.5% higher to $6.49 per share over the past 60 days.

MDU Resources Group: This Bismarck, ND-based company provides value-added natural resource products and related services to its customers. The company recently spun off its construction materials subsidiary, Knife River Corporation, and focuses solely on its energy delivery business.

The company has planned $530 million in capital investments in 2023 to strengthen its gas distribution operations further. MDU continues to add new customers in its operating territories, which is boosting demand for its services. The Zacks Consensus Estimate for MDU's 2023 earnings has moved 2.3% higher to $1.36 per share over the past 90 days. The stock currently carries a Zacks Rank #3.

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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance  for information about the performance numbers displayed in this press release.

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Sempra Energy (SRE) : Free Stock Analysis Report

Southwest Gas Corporation (SWX) : Free Stock Analysis Report

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MDU Resources Group, Inc. (MDU) : Free Stock Analysis Report

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