Gas utilities mostly beat earnings expectations; stocks surge on M&A speculation

Natural gas utilities posted marginal improvement on the group's shaky performance in recent earnings reporting periods, but the subsector's stock price surge did not get underway until a major acquisition offered more evidence that private infrastructure funds have put rich valuations on gas utilities.

Five out of nine gas utility operators selected by S&P Global Market Intelligence topped Wall Street's expectations for EPS in the quarter that ended Dec. 31, 2021, and one matched consensus expectations. In the prior quarter, three beat analysts' expectations and two matched them.

Warm winter restrains earnings

The companies that posted the biggest misses, UGI Corp. and Spire Inc., reported that warmer-than-normal weather weighed on U.S. business segments. For UGI, commodity price volatility also dinged its international liquefied petroleum gas business. Several other companies cited warm weather as a headwind.

Four out of the nine companies reported quarterly EPS that topped year-ago EPS, marking a slight improvement from the prior quarter, when just two posted year-over-year growth.

No more than five members of the group have posted year-over-year EPS gains during the last three quarters. The group has been in something of an EPS slump following several quarters of solid year-over-year earnings growth.

Buyout boosts momentum

Despite the muted earnings performance and market turmoil spurred by Russia's invasion of Ukraine, stock prices for much of the group have been on a tear since Feb. 24, when South Jersey Industries Inc. announced it would go private in an $8.1 billion buyout. The deal was the second private market acquisition of a gas utility operator since the beginning of 2022.

In the view of Wall Street analysts, the multiples on the SJI deal reinforced the premium valuations placed on gas utilities in recent acquisitions, particularly by private infrastructure funds. Publicly traded local gas distribution companies have typically traded at a discount to electric utilities and multi-utilities in recent years.

"All in all, it is another compelling data point emphasizing the public-private disconnect to gas utility valuations," Mizuho Securities USA LLC analyst Gabriel Moreen said in a March 3 research note.

Among the top performers were several companies identified by Guggenheim Securities LLC as potential takeout targets: New Jersey Resources Corp., Northwest Natural Holding Co., Spire and One Gas Inc. Shares of Atmos Energy Corp., the group's only large-cap company, also zoomed higher following the deal.

Southwest Gas Holdings Inc., which is fending off a takeover attempt by activist investor Carl Icahn, initially continued trading in negative territory. However, the stock shot higher after management on March 1 announced plans to split its regulated gas transportation and unregulated energy infrastructure services segments into two separate companies.

Chesapeake Utilities Corp. and UGI were the only members of the select group still trading negative on the year. Both companies, which led the group in stock price gains in 2021, operate diversified businesses that include substantial midstream and propane segments.

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