Gas utility stock rally continues despite Q1 2023 slump in broader sector

Gas utility stocks underperformed the broader market but were among the most resilient names in the utility sector during the tumultuous opening months of 2023.

Six out of eight gas utility stocks posted gains in the first quarter, extending an end-of-year rally for a basket of equities selected by S&P Global Commodity Insights. The select gas utility index was up nearly 2.9% year to date through March 31, compared to the S&P 500's about 7.5% gain and the S&P 500 Utilities sector's 4% decline.

While utilities underperformed major indices, the sector pared losses in March as government bond yields fell amid a flight to safe-haven assets following bank failures, according to Nasdaq IR Intelligence senior analyst Massud Ghaussy. The market's expectations for future interest rate hikes by the US Federal Reserve shifted lower, causing the gap between utility dividend yields and the US 30-year Treasury to narrow, Ghaussy told Commodity Insights.

The utility sector's dividend yield is currently lower than the long-term government debt yield, a historical anomaly that had triggered a sector sell-off, Ghaussy said.

"Until the banking crisis, the sector was drifting lower on limited volumes due to investor euphoria from the potential end of the Fed's tightening cycle," Ghaussy said. "The banking crises and renewed concerns about an economic hard landing due to tightening lending standards by commercial banks pushed the sector back up on higher volumes."

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All but two of the constituents in the select gas utility index traded lower at the end of a four-week quarterly earnings reporting period March 2. Those two stocks — Chesapeake Utilities Corp. and New Jersey Resources Corp. — also were the only two constituents to outperform the S&P 500 in the first quarter.

Group leader Chesapeake Utilities posted its best quarterly performance since the final quarter of 2021, marking a turnaround for the company, which underperformed the group throughout 2022. New Jersey Resource's gain, however, marked the second consecutive quarter of outperformance for the Garden State distributor, which led the group in the prior three-month period.

Stock price performance dropped off sharply among the remaining constituents, with Tulsa, Okla.-based One Gas Inc. posting a 3.8% gain and several peers — Southwest Gas Holdings Inc., Atmos Energy Corp. and Spire Inc. — gaining about 1% during the quarter. One Gas, Atmos and Spire saw more muted gains than in the prior quarter, while the result was a marked improvement for Southwest Gas.

The Las Vegas-based distributor was the group's biggest laggard in the back half of 2022 and the only constituent that did not participate in the fourth-quarter 2022 gas utility stock rally.

Northwest Natural Holding Co. was the group's worst stock price performer throughout much of February, but UGI Corp.'s share price decline accelerated in March. The result continued a volatile quarter-to-quarter performance for UGI, a diversified energy delivery company that posted the group's biggest annual stock price decline in 2022.

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