Wall Street expects quarterly earnings to slump at natural gas utility operators, following a quarter when many companies in the group saw a pause in strong year-over-year earnings growth. Yet many analysts will be focused on executives' outlooks on how rising gas prices will affect future earnings.
"We haven't had gas prices at this level in several years, so it's tough to have a good idea of how customers will behave when prices are at these levels," Morningstar analyst Travis Miller said.
In a group of nine gas distributors selected by S&P Global Market Intelligence, analysts forecast all but one posting lower EPS in the third calendar quarter, compared with the year-ago period. The outlook is mixed for multi-utilities: seven out of 15 select companies are tipped to post year-over-year EPS growth, and six are expected to report a decline, according to consensus estimates calculated by S&P Capital IQ.
The third quarter marks the second half of shoulder season for distributors, when gas use slumps during moderate temperatures. All but one of the companies reported year-over-year gains in the year-ago period, part of a string of solid gains.
But year-over-year EPS growth began to sputter in the second quarter when five companies in the group — South Jersey Industries Inc., Northwest Natural Holding Co., UGI Corp., Chesapeake Utilities Corp. and One Gas Inc. — reported year-over-year gains. The remaining four — Spire Inc., Atmos Energy Corp., New Jersey Resources Corp. and Southwest Gas Holdings Inc. — posted declines. Still, seven out of nine posted EPS results that surpassed analysts' expectations.
High gas prices sink stocks, cloud outlook
The third quarter also marked the weakest this year for gas utility stock performance. An index of the nine select gas distributors plunged 7.4%, while the S&P 500 ended the quarter roughly flat and the S&P 500 Utilities sector gained 0.9%. The third-quarter underperformance continued a trend that began at midyear, when a brief period of outperformance for gas utility stocks ended.
"Disruption in the natural gas markets, a rise in Treasury yields, and the market's focus on inflation all contributed for a dismal September performance," Nasdaq IR Intelligence senior analyst Massud Ghaussy told Market Intelligence.
In addition to concerns over gas prices, higher interest rates and expectations that the Federal Reserve could hike rates to tame inflation have sapped investors' interest in bond proxies like utility stocks, Ghaussy explained. To the extent investors are getting defensive, they have opted for healthcare equities, Ghaussy added.
In a recent research note, Mizuho Securities analyst Gabriel Moreen also attributed the third-quarter slump to investor concerns over the impact of the surge in gas futures prices, which are sitting above $5/MMBtu through the winter. The fear is that higher heating bills will lead to more bad debt during an already uncertain economic recovery, Moreen said. He noted that two stock price underperformers — Atmos and One Gas — are still recovering extraordinary gas costs from February's winter storms.
Investors also worry that prolonged high gas prices will make it harder for distributors to produce strong rate base growth, as regulators restrict capital spending and clean energy investments to minimize bills, Moreen added. He said gas utilities can manage the near-term headwinds, while the long-term concerns are overdone.
"In our view, a hyper-bullish, long-term gas price outlook ... is necessary to justify the recent sell-off in [local distribution company] equities which were already trading near trough valuations," Moreen wrote. "But that does not appear to be the Street's consensus view according to the gas curve."
Focus on low-carbon fuels, shareholder activism
The only gas utility expected to post year-over-year earnings growth during the reporting period is also the group's top stock price performer for 2021: Chesapeake Utilities. Like the group's second-best performer — UGI Corp. — Chesapeake Utilities is a diversified company with midstream and propane segments.
Both companies are also seeking a pole position in renewable natural gas, or RNG, an alternative fuel processed from waste methane at farms, landfills and other facilities. Utility executives have lately highlighted RNG procurement and investment plans during conference calls. Analysts may question executives about supply chain issues, after South Jersey Industries flagged some tightness in supply due to increased demand for RNG production equipment.
In the previous quarter, companies also continued updating analysts on their efforts to incorporate low-carbon hydrogen into distribution systems. Gas utility operators announced at least 26 hydrogen pilot projects since the third quarter of 2020, according to a review by Market Intelligence.
Analysts will also get an opportunity to quiz Southwest Gas on a planned proxy battle and takeover bid launched by activist investor Carl Icahn. The company could also face questions about an investigation into its safety record in Arizona.
Most gas distributors and multi-utilities begin reporting the week of Oct. 24, with several companies reporting fiscal fourth quarter earnings through mid-November.