3 Gas Distribution Stocks to Buy From a Flourishing 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.

Atmos Energy Corporation ATO, with its widespread transmission and distribution lines, interstate pipelines, and significant investments in infrastructure development projects, is poised to benefit as natural gas production volumes are expected to increase in 2024-2025. Steady investments and expanding infrastructure in crucial production regions should drive the performance of National Fuel Gas Company NFG and New Jersey Resources Corporation NJR.

About The Industry

The shale revolution has substantially increased natural gas production. Its clean-burning nature has steadily boosted the 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. United States has 3,353 trillion cubic feet of natural gas and a natural gas pipeline network of 2.6 million miles is utilized to distribute gas to customers. 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 the demand for natural gas and, consequently, for pipelines.

Factors Shaping the Future of the Gas Distribution Industry

Production & Export Volumes of Gas to Increase: The short-term energy outlook released by the U.S. Energy Information Administration indicates that domestic dry natural gas production will remain similar to the 2023 levels in 2024 and increase 1.6% year over year to 105.2 billion cubic feet per day (Bcf/d) in 2025. EIA also forecasts gas consumption to increase 0.3% year over year to 89.4 Bcf/d in 2024. Export volumes are expected to increase in 2024 and 2025, providing relief to natural gas transporters. EIA expects U.S. liquefied natural gas export volumes to increase 2% year over year to 12.2 Bcf/d in 2024 and exports to increase 18% to 14.3 Bcf/d in 2025. This indicates the need for more pipelines to send LNG to export terminals.

Fresh Investments Create Opportunities: The clean-burning nature and wide availability of natural gas across the United States are driving demand. At present, 187 million Americans use natural gas. The distribution network will continue to transport natural gas to all parts of the United States. With five 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 EIA, once completed, the five new LNG projects will increase the combined export capacity by 9.7 Bcf/d by 2025. Per the American Gas Association report, 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. Per the report, natural gas utilities are investing $33 billion each year to increase the reliability of natural gas distribution and transmission systems, indicating the long-term growth potential of this space.

Likely Drop in Interest Rate to Act as a Tailwind: In order to maintain, upgrade and expand operations, utilities approach capital markets for loans. Utilities have been enjoying near-zero interest rates for the past few years. However, multiple rate hikes by the Federal Reserve took the benchmark rate to 5.25-5.50%, which impacted utility operators. However, in its last few meetings, the Fed did not increase the benchmark rate. In the recently concluded Fed meeting, interest rates were unchanged. Fed officials indicated that they would probably reduce the interest rates in September if the positive development continues. The likely drop in interest rates would be a positive for utility operators planning large investments in infrastructure upgrades and the addition of renewable sources of energy to produce electricity.

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