4 Gas Distribution Stocks Worth Adding in a Flourishing Industry
About the Industry
The shale revolution has significantly boosted natural gas production, while its clean-burning properties have driven growing demand across residential, commercial and industrial sectors. Natural gas distribution pipelines play a crucial role in delivering gas from intrastate and interstate transmission systems to end-users through smaller-diameter lines. The United States possesses 3,353 trillion cubic feet of natural gas and operates a 2.6-million-mile pipeline network. However, the industry faces challenges from aging infrastructure, rising upgrade costs, and increasing competition from alternative clean energy sources, which can lower the demand for natural gas and, consequently, for pipelines.
Factors Shaping the Future of the Gas Distribution Industry
: 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 22.7% year over year. In 2026, LNG export volumes are expected to increase 9.6% year over year. Therefore, the gas pipelines will play a crucial role in transporting natural gas to these export terminals.: 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%. Rates have remained the same in the fourth straight meeting, with more rate cuts expected in the second half of 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.: The clean-burning nature and wide availability of natural gas across the United States are driving demand. At present, 189 million Americans use natural gas. The distribution network will continue to transport natural gas to all parts of the United States. Per the American Gas Association report, one residential customer signs up for natural gas service every minute, and 60 businesses add natural gas service each day. Per the report, natural gas utilities are investing $37 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 Solid 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 14-stock group within the broader Zacks Utilities sector — currently carries a Zacks Industry Rank #52, which places it in the top 21% of the 244 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 S&P 500 and Sector
The Gas Distribution industry has outperformed the Zacks S&P 500 composite and its sector over the past year. The stocks in this industry have gained 18.1% in the said time frame compared with the Utility sector's growth of 16.1%. The Zacks S&P 500 composite has gained 10.8% in the same time frame.
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 11.12X compared with the Zacks S&P Composite 500's 16.96X and the sector's 15.09X. Over the past five years, the industry has traded at a high of 11.77X and a low of 9.11X, with a median of 10.3X.
Gas Distribution Stocks to Add to Your Portfolio
All four natural gas distribution stocks mentioned below currently carry a Zacks Rank #2 (Buy) each. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here. 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. It continues to replace old pipelines and provide reliable services to its expanding customer base.The current dividend yield is 2.23%, better than the Zacks S&P 500 Composite's yield of 1.6%. Long-term (three to five years) earnings growth is currently pegged at 7.19%. The Zacks Consensus Estimate for ATO's fiscal 2025 and 2026 earnings has moved up 0.6% and 0.5%, respectively, over the past 60 days.
UGI Corporation: This King of Prussia, PA-based company is engaged in the regulated natural gas distribution and storage business in the United States and internationally. It is likely to make a capital investment in the range of $3.7- $4.1 billion through fiscal 2027 to further strengthen its operation and serve its customers efficiently.The current dividend yield is 4.12%. Long-term earnings growth is pegged at 5.2%. The Zacks Consensus Estimate for UGI's fiscal 2025 and 2026 earnings per share has moved up 2.29% and 3.19%, respectively, over the past 60 days.
ONE Gas Inc.: This Tulsa, OK, based 100% regulated natural gas distribution utility provides natural gas distribution services to more than 2.3 million customers. The company continues to make investments to strengthen its infrastructure and aims to invest $4 billion through 2029, a major portion will be directed toward system integrity and replacement projects.The current dividend yield is 3.64%. Long-term earnings growth is pegged at 5.6%. The Zacks Consensus Estimate for OGS' 2025 and 2026 earnings per share has moved up 0.7% and 0.2%, respectively, over the past 60 days.
Northwest Natural Holding Company: This Portland, OR, based gas distribution company provides services to residential, commercial and industrial customers primarily in the United States, Canada and the Service Territory. The company plans to invest in the range of $2.5 billion to $2.7 billion through 2030 to further strengthen its operations.The current dividend yield is 3.64%. The Zacks Consensus Estimate for NWN's 2025 and 2026 earnings per share has moved up 1.8% and 1.3%, respectively, over the past 60 days.
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Atmos Energy Corporation (ATO) : Free Stock Analysis Report
Northwest Natural Gas Company (NWN) : Free Stock Analysis Report
UGI Corporation (UGI) : Free Stock Analysis Report
ONE Gas, Inc. (OGS) : Free Stock Analysis Report
This article originally published on Zacks Investment Research (zacks.com).
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